How Freelancers Can Save for Retirement — in 4 Easy Steps

For the millions of Americans who are now part of the growing gig economy, there are myriad benefits to eschewing traditional employment: flexible hours, geographic flexibility, and career autonomy, to name a few.

Yet there are trade-offs too — especially when it comes to saving for retirement.

Among full-time gig economy workers, seven in 10 say they are unprepared to maintain their current lifestyle in retirement, while fewer than one third are regularly setting aside money for retirement, according to a recent survey on behalf of the online investment firm Betterment.

By comparison, 64% of workers overall say they're confident they'll have enough money to live comfortably throughout retirement, and nearly six in ten are currently saving, according to a separate survey by the Employee Benefit Research Institute.

To be fair, many Americans are actually behind the eight ball when it comes to retirement planning, with studies indicating that roughly half of the population has saved very little or nothing.

Still, without the usual perks and safety-nets offered by traditional employers, “giggers” need to take extra initiative to build a nest egg.

“The burden is on them, a lot more so than for non-gig-economy workers who have employer-sponsored 401(k)s,” says Nick Holeman, a certified financial planner with Betterment, which surveyed 500 full-time gig workers and 500 so-called “side hustlers” for its report, “The Gig Economy and the Future of Retirement.”

What's the Biggest Savings Hurdle for Gig Economy Workers?

It isn’t a dearth of savings options that's to blame.

“At the end the day, as a gig employee you may be able to put away more than you could as an employee,” notes Isabel Barrow, a CFP and associate director of financial planning with Edelman Financial Services.

Self-employed workers can sock away as much as 25% or $55,000 of eligible compensation (whichever is lower) in tax-deductible SEP IRA plans, to name one of many tax-friendly retirement vehicles available to them.

Nor is it a lack of tech savvy, as most gigs today require individuals to navigate technology in some shape or form. The Betterment survey found that 59% of people working in the gig economy use a digital platform for their job, but only 19% use an automated savings tool or app to save money.

The biggest hang up?

For most gig employees the barriers are primarily behavioral.

In absence of ready-made retirement plans, automatic withdrawals from paychecks and, last but not least, matching contributions, gig employees need to have as much gumption about saving as they do working.

The best strategy for how, when and how much to save may not be as straight-forward as it is for salaried employees, says Barrow, but gig workers do need to be intentional about their savings.

“At a minimum, aim to put away 10% of each paycheck,” she says, whether that comes in two large contracts a year or trickles in as small and frequent payments.

How Gig Economy Workers Can Jumpstart Their Savings

Step 1: Just Do It Already

If you haven’t yet, open a retirement savings account with a brokerage firm that offers savings options geared toward the self-employed set. These include Roth IRAs, traditional IRAs, SEP-IRAs and Solo 401(k)s, among others.

Need some more guidance but aren’t ready to work with a traditional financial advisor? Consider starting with a robo-advisory firm such as Betterment and Wealthfront, which provide advice online for relatively low fees.

While investment choices, fees and taxes are all important — and add up over time — don’t let these decisions overwhelm you early in the game. The important thing, says Holeman, is to get in the habit of setting aside money on a regular basis, in a separate account.

Step 2: Make Saving Automatic

Saving and investing can be as complicated as you make it, but the biggest predictor of success is simple: Save consistently. For giggers, who typically don’t have regular and predictable paychecks, however, automatic withdrawals can be daunting.

For this reason, saving for retirement often starts with a strategy for managing cash flow. For example, many savvy giggers "pay themselves" a regular monthly or bi-weekly salary — deducting taxes and retirement savings from each paycheck.

When work is plentiful, they let additional cash accumulate in their business accounts so they can continue paying themselves when times are slow. (On a related note: gig employees should strive to have at least six months of expenses in cash, says Holeman.)

Step 3: Be Strategic About Savings

Whereas employees generally spread their retirement savings evenly across their paychecks, gig workers may need to save a smaller percentage on an automatic monthly basis — but then make larger quarterly or annual contributions to supplement their automated efforts.

The nice thing about this approach, Holeman notes, is gig workers can be more strategic about whether they take the tax deduction now — as with a traditional IRA, SEP or Solo 401(k) — or pay taxes upfront and save in a Roth or Roth 401(k).

“If you have a good year, the deduction might make sense, but if you have a down year you can do the Roth and pay the tax now, though at a lower income tax rate,” he says.

Unlike standard Roth IRAs, Roth 401(k)s don’t have income limitations.

Step 4: Play to Your Strengths

All told, gig employees may actually have an advantage over their 9-to-5 counterparts when it comes to making the math work in retirement.

In the Betterment survey, one in five full-time giggers say they’ll continue to pick up incremental work as their main source of income when they reach retirement age, while 12% of part-time giggers plan to stick with their side gigs after they clock out of their jobs.

“There are many different levers that gig employees can pull leading up to and in retirement,” says Holeman.

This isn’t to say gig employees need to save less — health complications alone can derail plans to keep working. Rather, the same flexibility that is giving rise to the gig economy can be good news for a gig retirement.