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Are you a gig, saving for the old-age pension?

Presented by your online pay stub creator  07-16-2019

   By John Wolf 

Who are the gig workers, and what is their economy?

The gig economy, a new world of temporary and flexible work contracts,  between individuals and employers that can be other people or businesses.   

Gig worker can be independent contractors or freelancers. Differently, from full-time employees, the gig workers are not considered as regular workers, their Salary is paid per jobs done and not per 8 hours a day and 40 hours per week.

The gig economy workers do not work for a lifetime in the same workplace. Those who do desk work like writers or programmers will work from their home office or coworking rental space.

Uber drivers will work in the streets, and Airbnb will attend their guests from home.

The Gig Economy Factors

RETIREMENT MONEY

The gig economy is growing every day into a more significant part of the US workforce. It is estimated that one-third of the working force is taking some part of the gig activity.

The gig economy is expected to keep growing, using the new and abundant technologies that make it possible to work simultaneously from remote stations on the same project.

It is essential to learn about Independent contracting work that is developed for outsourcing services that do not require the presence of the freelancer at the office of the organization that ordered the work or service.

Employers can choose from many people that offer their work online on the websites that are dedicated to contact those who offer themselves to those who need someone to do the job for them.

The gig economy is growing alongside the regular economy, filling the need for small jobs for the companies that can not have a full-time employee for these jobs.

For example, developing software or creating a graphic design for a one time project. A part-time employee is yet a long term commitment, while a gig worker has no responsibility more than the specific job and its payment.

The gig economy workers are coming from different segments of the country’s workforce, some are taking the gig jobs as an extra income to their permanent employment, others find that they can work only as gigs and make enough income for their standard of life.

The use of coworking spaces creates an environment that encourages the gig workers to join in a group for a limited job or per projects, where each one takes one part of the production.  For example, a writer, and a graphic designer with a programmer can offer their combined skills to the customer.

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Close to 13% of the U.S. workforce are independent contractors, according to a Gallup workplace report:

 36% of all U.S. workers were gig workers during 2018. “Gallup estimates that 29% of all workers in the U.S. have an alternative work arrangement as their primary job. This includes a quarter of all full-time workers (24%) and half of all part-time workers (49%). Including multiple job holders, 36% have a gig work arrangement in some capacity,” states the report.

Working hard, having high skills, being good with consumers or clients, and taking all the advantages that coworking space can give, a gig worker can make good earnings.

Get paid as an independent contractor means that the gig workers have to take care of paying taxes, health insurance, and saving for retirement by themselves. Take a moment to read about: How to Report and Pay Independent Contractor Taxes

The gig workers do not have access to the benefits like health and disability insurance that are provided by employers to their employees. Saving for retirement still, have good other options. You can read more in this guide saving for retirement.

Gig economy workers cannot use the 401(k) plans like the regular full-time worker that are saving for retirement. Independent contractors do have some options for saving money for old age. We will review the choices below. Learn about: The Different in Pay Stub Between Regular Employees and Contractors

Resting in front of the lake

 

SIMPLE IRA

If you are working as an Uber driver or a freelancer, you are defined as an independent contractor. You may use the SIMPLE IRA (Savings Incentive Match Plan for Employees) lives up to its name. You can contribute $12,500 per year, or $15,500 if you’re over 50. These contributions are pretax money, it means that when you prepare your tax return, you will not add this amount to the taxable total of earning.

SEP-IRA

The  SEP-IRA (Simplified Employee Pension plan) main advantage is its high contribution limit. You can contribute up to 25% of your income, up to the maximum of $53,000 a year. The significant advantage of the SEP-IRA (Simplified Employee Pension plan) is the high contribution limit.

You can contribute up to 25% of your pay, up to a maximum contribution limit of $53,000 a year. Here again, it is pretax money, no taxes will be taken from this amount. Note that elective salary deferrals and catch-up contributions are not permitted in SEP plans.

A man sits while writing in front of a computer

Solo 401(k)

Solo 401(k)s, or its full name “one-participant 401(k) plans”, permits you to make a significant contribution as  $18,000 ($24,000 if you are over 50) at the starting moment and after that, you are allowed to contribute up to 25% of your salary up to a maximum total contribution limit of $53,000.  You can reach the maximum $53,000 ($59,000 for those over 50) much faster

If you chose the solo 401(k), you would need contributing $18,000 upfront and keep contributing for pension the 25% of your salary, in this case, you could reach the limit at a much lower salary level.

You can take a loan on the lesser of the $50,000 or 50% of your total distribution. The loan is for not more than five years with a reasonable interest rate. You will have some hassle with the paperwork for the application of this loan. Another small issue with the government is when the balance reaches $250,000, you will have an obligation to file it annually.

A Retired Couple

Traditional and Roth IRAs

These plans are not made for independent contractors, though these plans are suitable for those who just started and can contribute only small amounts.     For the two option, traditional and Roth IRAs, annual contributions are limited to $5,500, or $6,500 if you’re over 50. Regular IRA contributions are made before taxes, while Roth IRA contributions are in after-tax.

There is a significant advantage with the Roth IRA, your contributions (Pre-investment returns) that you can always be withdrawn tax- and penalty-free. Once you talk about earnings, it is a different story. The rules for withdrawal are more complex, you need to have the account for more than five years to meet the allowable circumstances for early withdrawal.

If you’re just getting started business, the Roth has another reason to be preferred, your brackets must be lower, so you better pay now the 15% than 33% once you are retired and have some wealth accumulated.

Get started

We presented some of the options for retirement planning for independent contractors. You will have to see which one is that is best for your circumstances.

Before you make any decision, take into consideration the contributions you can make now, and what do you expect to be able to contribute in the future.

A survey found that the earliest people start saving the have more they have in their pension funds. The difference between those who started in their 20s and the late starters on their 40s or 50s. can be in hundreds of thousands of dollars. It is so logic and straightforward to say Strat as soon as possible no matter how old are you just start.

Working station

Here are some ideas about start saving right now.

Make It, As a Rule, To Invest the 15% for Retirement

A slice of 15% of your income will not drive you to starvation, you will keep being alive and enjoying your life. Take 15% of your gross income into your savings for the time of old age.

You can use many retirement plans, here we will review some the options.

 Spread Your Money Around

The adage “do not put all the eggs in one basket” is always good to accomplish. Do not risk your pension funds by keeping them in one place.

One way to avoid this risk is to put the money in one of the mutual funds, You can choose any of the companies that are having a history of a strong return for both your 401(k) and Roth IRA investments.

You may diversify by spreading the money between the high-quality mutual funds in these categories:

  • Aggressive Growth
  • Growth
  • Growth and income
  • International

When you invest in this way, you are using the power of the stock market to build your retirement funds without the risk of having it is as a single stock investment.

Coworking space

T-Bills vs. Mutual Funds

Treasury Bills

Treasury bills or T-bills are short terms borrowing by the US government from the people. This a borrowing instrument that the U.S. Department of Treasury us using by issuing and selling to the public.

T-bills represents the obligation of the federal government to pay back to its handler. There is an expiry date for each T-bill emission, ranging between half a year to one year. The longer maturity time is the more money you are making by holding it until it is matured.

T-bills are easy to convert in cash, you can sell them to other investors. There is no risk in holding T-bill, the U.S. Treasury will always honor this obligation. They can print more money for this. Buying T-bill has no risk at all.

Mutual Funds

The mutual fund is a pool of invested money, managed by professionals in the capital markets, on the investors’ behalf. Mutual funds are ideal for people that do not have the knowledge and the time to be on top of the stock markets. This service will cost you a flat percentage per year. Some funds will charge you for withdrawals as a way to discourage you from frequent money withdrawals

The diversified investments of the mutual funds are made by holding a large number of financial assets. All the investor as smaller or bigger they participates in the results of the mutual fund investments, in this way, you get the benefit of diversification.  It is not practical to buy $5,000 stock of five or ten companies, it will be convenient to invest $5,000 in a mutual fund and may have the results of buying ten companies stock. This way the risk is divided, if one company collapses, you may have another one that made a great year, so it compensates the loss from the collapsed company

An elderly man

Risk vs. Return

In the world of finance, the risk and return are going hand in hand. Treasury bills are the safest asset in the market. Therefore, they have the lowest return on investment (ROI). T-bills are not having more than a marginal return above inflation. With the government guarantying the value of your money you can be sure that if you have saved enough money for you to live until your late nineties, you will preserve it if the stock market collapses.

For those who are willing to take the risk and make their money grow, it is better to invest their money in mutual funds. You can have your money in a few mutual funds and expect some less risk but is the stock market will collapse it will affect all the economy, and you may lose some of the money you already made. “Do not put all the eggs in one basket”  remember that old phrase? You better have a mix of the two instruments.

A black swan

Nassim Nicholas Taleb, in his book The Black Swan, mentioned his recommendation to have 85% of your saving in T-bill and only 15% in more risky investments.

Every time you get a paycheck and your paystub show no withholding at all, remember that before you go shopping, you have to pay taxes and make a contribution to your pension funds.

paystumbmakr.com team thanks you for a visit and reading this blog      Pays tub online

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Disclaimer: John Wolf and paystubmakr.com are making a total effort to offer accurate, competent, ethical HR management, employer, and workplace advice.  We do not use the words of an attorney and the content on the site is not given as legal advice. The website has readers from all US states which all have different laws on these topics. The reader should look for legal advice before taking any action.  The information presented on this website is offered as a general guide only and never as

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