The gig economy as a backup retirement plan

Today, more than one in three U.S. workers are freelancers in the “gig economy,” relying on do-it-yourself employment either as their main source of income or as a side job. Freelancers are expected to grow to make up 40% of the American workforce by 2020.

As the shift in the traditional employer-employee relationship continues to expand, the gig economy is changing the way Americans earn, spend and save for retirement.

But few in this emerging freelance class are seeking the advice of traditional financial planners, according to a new report from Betterment, a leading online investing platform. Only 20% of freelancers who invest on a regular basis said they use an in-person wealth manager, compared to 28% who use a robo-adviser and 36% who invest on their own.

Betterment’s report examines the financial profiles of two distinct categories of gig economy workers: full-time giggers, who rely on independent work or temporary contracts as their main source of income, and side-hustlers, who supplement a traditional full-time job with an independent or temporary gig. Half of the 1,000 Americans age 25 or older who participated in an invitation-only online survey in February are full-time giggers. The other half have side jobs.

The Betterment survey found that 40% of all the respondents feel unprepared to save enough money to maintain their lifestyle during retirement and 16% said they plan to keep working as freelancers to supplement their income in retirement.​

In a separate report on financial wellness, 27% of respondents in Prudential’s quarterly American Workers Survey said they had to take an additional job to make them more financially secure and more than half said they expected to delay retirement because they hadn’t saved enough.

New data from Northwestern Mutual’s 2018 Planning & Progress Study echo those concerns. The Northwestern Mutual study found that 55% of Americans plan to work past the age of 65 out of necessity, with the majority citing “not enough money to retire comfortably” as the main reason.

Many employees with traditional nine-to-five jobs are using side hustles to fill gaps in their retirement savings, according to the Betterment report. Near half of all side-hustlers — and 76% of those over the age of 55 — are using earnings from their side job to save for retirement. Two-thirds of high earners, defined as those making $100,000 a year or more between their regular and side jobs, hope to use their extra earnings to retire before age 66.

Full-time giggers, ranging from millennials to boomers, are less prepared for retirement. More than 30% of people who make their main income through the gig economy set aside no money for retirement on a regular basis, and 70% say they are unprepared to maintain their current lifestyle in retirement, according to the Betterment report.

Although most full-time and part-time freelancers use a technology platform for their job, such as a ridesharing app to drive for Uber or Lyft or a home-sharing website to list a spare room for rent, there is a major disconnect when it comes to the way they save. Only 19% of freelancers use an automated savings tool or app to save money. More than 40% of them report storing cash at home.

Betterment hopes to change that behavior and improve financial security for future retirees who don’t have a pension, and in many cases, also lack access to an employer-sponsored retirement plan.

“Not having a pension or 401(k) puts the burden of saving on the employees themselves,” said Nicholas Holeman, a senior financial planner at Betterment.

“But with an IRA, you have more choices. You can automate your contributions and choose any provider and any ETFs,” Mr. Holeman said. “You can do better than people who have a horrible 401(k) with high fees and poor investment choices.”

Betterment has partnered with Uber to include a Betterment portal on the driver app. Freelancers can direct a portion of their Uber payments​ to an online banking account or a traditional or Roth IRA, including a SEP IRA option that allows higher contribution limits for the self-employed. The company is pursuing similar partnerships with other gig economy employers.

“Our aim at Betterment has always been to leverage the power and ubiquity of technology to make investing and saving for retirement accessible and easy,” the report concluded. “With affordable, automated investment options for full-time workers and giggers alike, we look forward to partnering with workers on this new path to retirement.”