Yahoo Finance Social Security Taxes Won’t Give Gig Workers a Secure Retirement — Here’s What Can
The average gig worker is likely just clearing enough money to pay bills, or perhaps supplementing a day job. As such, they may not be paying enough (if anything) in Social Security taxes toward their eventual retirement.
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This can put gig workers in a tough spot come retirement time if they don’t have a long employment history behind them in which they paid well into Social Security. What can gig workers do to be prepared for retirement? Experts explain here.
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Balance Immediate Needs With Savings
Gig workers often struggle with balancing all their expenses when income isn’t coming in regularly. According to Sherman Standberry, a licensed CPA and managing partner at My CPA Coach, freelancers often prioritize immediate business needs over long-term savings, resulting in insufficient Social Security contributions.
“Most gig workers consider the requirement to pay both the employer and the employee portions of Social Security taxes to be a considerable financial burden. Therefore, consulting tax experts is crucial for freelancers to get proper guidance on understanding their freelance business structure and help them maximize deductions,” he said.
Proper tax planning ensures freelancers don’t overpay taxes, allowing them to allocate more funds for retirement savings.
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Establish Clear Retirement Goals
Standberry suggested that gig workers should first establish clear retirement and financial goals for themselves and use these as a benchmark for decision-making.
“Having a specific retirement age goal or desired post-retirement income provides direction and motivates consistent financial planning, saving and investing. These plans enable freelancers to make informed decisions aligned with their lifelong aspirations and help them meet future retirement costs without shortfalls.”
Retirement Plans Are Not Out of Reach
A common misconception among gig workers is that setting up retirement plans is expensive and complicated.
“However, affordable and straightforward options exist, such as SEP IRAs, Solo 401(k)s, and Traditional or Roth IRAs. These accounts offer significant tax benefits and higher contribution limits than standard individual retirement accounts. For instance, some options allow independent contractors to contribute as both employees and employers, significantly boosting retirement savings,” Standberry explained.
Indeed, CPA tax advisor Nischay Rawal added, “I’ve helped clients earn 6-8% annual returns in balanced portfolios, which can generate $30-50K more in retirement income than Social Security alone.
Become Investment Savvy
Additionally, since investments are likely to net greater gains than just saving alone, Standberry suggested that gig workers who learn to diversify investments will be in better shape in retirement.
“Investment in pension funds, real estate, and other ventures provides additional income and security. Real estate, particularly rental properties, offers passive income and appreciates over time, forming a strong economic foundation,” he said.
Setting aside a fraction of monthly income for retirement every month can accumulate into a substantial sum over time, he said.
Pay Estimated Quarterly Taxes
Depending on how much you make, Rawal recommended paying quarterly estimated Social Security taxes. This means that according to the IRS’s quarterly payment schedule, you assess what you earn after accounting for expenses in that quarter’s income.
“While the money freelancers pay into Social Security likely won’t cover 100% of their retirement needs, the benefits are still significant,” Rawal said.
Consider Annuities
Annuities are another option to generate guaranteed lifetime income, Rawal said. “One of my clients bought an annuity at 65 and now receives over $2,000/month on top of Social Security. While annuities have high fees, a small one can provide security.”
For the self-employed, paying taxes and saving for retirement requires discipline. But with the right planning, freelancers can generate enough income to enjoy their golden years.
“My advice is to start with what you can, then increase contributions over time as your business grows. Some money towards retirement, even if not the maximum, is better than none,” Rawal said.
Set Up Automatic Transfers
The way to prepare for retirement when you don’t have an employer taking out your taxes is to be disciplined in your retirement savings approach, according to Spencer T. Hakimian, founder of Tolou Capital Management.
“Setting up automatic transfers from their income to a dedicated retirement account can help ensure consistent contributions,” he said.
When considering whether to prioritize paying into Social Security or investing their own money otherwise, freelancers should aim for a balanced approach, Hakimian stressed, especially with the unpredictability of future Social Security benefits.
By investing their own money, freelancers can exert more control over their retirement funds, tailoring their investment strategies to their specific financial goals and needs.
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