If you’re a temporary or on-demand worker, retirement planning might not be something you think about much. It’s easy to understand why — if you need money now, you don’t want to commit it to a fund that you can’t touch for 30 or 40 years. Maybe you’ll start next month, or next year.
Plus, and let’s be honest here, retirement planning just isn’t that interesting. With all the talk of mutual funds, stocks, bonds, and trackers, it seems like a confusing topic. But, as most of us would agree, someday you’re not going to want to work any more. The only way to do that comfortably is if you’ve put money aside.
In other words, you do need to think about retirement planning, and the sooner, the better. As a temporary worker, it’s vital — if you don’t have an employer contributing towards your retirement, then it all comes down to you.
The good news is that retirement planning isn’t as difficult as you might think. We’ll give you the advice you need to start your planning now, so you can build up a good nest egg to secure your long-term future. There’s some good news too — with 37 being the average age of a Wonoloer, most of us have lots of years to go to build up a cash cushion. Time to get started.
The Advantages of a Retirement Plan for On-Demand Workers
The most obvious benefit of a retirement plan is that it gives you financial freedom when you decide to stop working. In fact, if you don’t want to just rely on social security, it’s the only way to have enough money to live comfortably when you’re not bringing in a salary. Fortemps and freelancers, financial security is even more important, and getting into the habit of retirement saving is vital. Here are some of the other advantages.
Benefitting from Compound Interest and Returns
Long-term investing depends not just on the money you’re contributing, but automatically reinvesting the returns you get, to generate more money. This is known as compounding, and it’s an incredibly powerful way to grow your wealth.
Here’s the effect that a 7% investment return rate has, when compounded over time. The “Base” column is how much you’d pay into the retirement account over time, the “Cmpd” column is how much you’d get back after that time, due to compounding returns.
|Years of growth|
|10 years||20 years||30 years||40 years|
So if you could pay $200 a month into a retirement account for 30 years, you would pay in $72,000 but compounding would mean you’d get $246,000 back, a difference of $174,000! Committing to regular contributions to your retirement plan is one of the best approaches for an on demand worker.
If you want to work out how much you might have at retirement, try this excellent calculator.
Many retirement accounts give you significant tax advantages. Plans like the 401(K) or Individual Retirement Account (IRA) mean you do not have to pay tax until you withdraw money. Any money you pay in now is deducted from your income when working out how much tax you owe. That’s a huge advantage and helps your money go further.
There are other types of retirement accounts where you pay tax now but don’t pay any tax when you take money out after you retire, these are typically known as ROTH plans. More about those plans below.
Regular Investments and Diversification
If you contribute some money every month and choose to invest in a broad range of options, you’ll get a naturally diversified retirement plan. This means that even with downturns in the economy and stock market, your retirement fund should grow over many years.
How to Choose the Right Retirement Plan for an On Demand Worker
As a temporary worker, there are several different types of retirement plans you can invest in. We’ll split them into two categories:
- Retirement plans where you don’t pay tax now, but do pay it later.
- Retirement plans where you do pay tax now, but don’t pay it later.
Retirement Plans Where You Don’t Pay Tax Now, but Do Pay it Later
There are many different types of retirement plans, with several of them depending on what type of business you are.For the sake of simplicity, we’ll just focus on two — the 401(K) and the Individual Retirement Account.
They both work in a similar way, and if you’re self-employed, you can use either. A 401(K) is slightly more complicated to setup and administer, but lets you put more of your money into the plan. An IRA is easier to use, but you can’t contribute as much.
Both types of plans let you choose from a wide variety of funds — for most people, “Target Retirement Funds” and “Index Trackers” are great default options.
Tax Implications of Regular Retirement Plans for the On-Demand Worker
These types of plans let you deduct the contributions from your earnings when you’re working out taxes. For example, if you earn $30,000 and put $3,000 into a retirement plan, you only pay tax on $27,000. But, this comes at a cost — you pay tax when you withdraw the money after you retire. So if that $3,000 grows to $10,000, you will pay tax on any of that $10,000 you withdraw. In other words, you’ll pay less tax now, but may pay more later.
Retirement Plans Where You Do Pay Tax Now, but Don’t Pay it Later
Like the other types of plans, there are a few plans of this type, known as ROTH plans. The main difference with these is that you do pay tax on your earnings and then contribute to these plans, but you get to avoid tax when withdrawing money later.
Tax Implications of ROTH Retirement Plans for the On Demand Worker
These types of plans do not let you deduct the contributions from your earnings when you’re working out taxes. For example, if you earn $30,000 and put $3,000 into a retirement plan, you still pay tax on the whole $30,000.
The advantage is that the money will not be taxed when you withdraw it. So if that $3,000 grows to $10,000, you won’t pay any tax on that $10,000 you withdraw. In other words, you’ll pay more tax now, but less later.
If You Have an Employer Offering a Retirement Plan
If you’re only a part-time temporary worker, and you have another employer, see if they offer retirement plans. If so, take advantage of them. Many employers offer to “match contributions” up to a certain amount, which is a great way of getting some free money into your retirement account.
Getting Started with Retirement Planning as an On-Demand Worker
Getting started with retirement planning is easy. First, you’ll need to work out your monthly budget, create an emergency budget, and work out how much you can set aside.After that, take a proportion of your disposable income, say up to a third, and put that aside for retirement. For example, you earn roughly $2,200 a month, and you have a budget of $1,800. That leaves you with $400 a month and you decide to put a quarter of that, or $100 a month into retirement.
Once you know how much you can afford to spend, you can talk to a specialized retirement planning business. There are plenty of them out there — Vanguard, Fidelity, Charles Schwab, your bank, and hundreds more. The next step is to contact them and talk to them about your needs.
The time to start is now — financial independence is a choice you can make, and the sooner, the better.
Note: Everyone’s circumstances are different, so we recommend speaking to an accountant or an independent financial adviser. They can take account of your financial needs and provide professional advice. We’re not investment experts at Wonolo, so please speak to someone who is.