Gig Economy: Why More Americans Are Becoming Self-Employed
The gig economy is perhaps the most significant social change of the 21st century, in my opinion. While some may consider this an overstatement, I’ll share with you how freelancing and self-employment, the two mainstays of the gig economy, are reshaping the social balance and what this can mean for retirement.
Freelancers, the flag bearers of the gig economy, comprise 36% of the U.S. workforce, according to a survey conducted by UpWork and the Freelancers Union, and it is expected that over the coming years, freelancers will represent over half of the American working class. Their annual contribution to the U.S. economy stood at $1.4 trillion at the end of 2017.
Why Americans Are Turning To The Freelance Economy
The survey identified five key reasons why so many Americans are ditching full-time employment to become freelancers:
• The desire to become their own boss.
• The ability to choose a flexible work schedule.
• The freedom to choose their own projects.
• The ability to work from anywhere.
• The ability to make extra income.
The Perks Of Being A Freelancer
A recent survey commissioned by TD Ameritrade identified that as many as 60% of Americans consider freelancing as the new version of the American dream. Respondents cited distrust in their employer as a major reason to become their own boss.
Additionally, quality of life, higher income prospects and an increase in the happiness quotient make freelancing an attractive choice in the current economy. A 2017 survey found that 65% of respondents thought freelancers are happier than other professionals, and the ability to be their own boss topped the list of reasons why professionals transition to freelancing.
According to the Freelancers Union and Upwork survey, nearly half (47%) of Millennials are already freelancing, and the trend is likely to grow in the future. The report revealed that the perception of freelancing as a career is becoming increasingly positive. In the case of Millennials, it is not only about achieving professional career goals but living a flexible and satisfying life. Many Millennials prefer freelance opportunities over traditional 9-to-5 jobs because of the flexible working hours.
According to Deloitte’s 2018 millennial survey, 43% of Millennials are likely to replace their full-time jobs with freelancing, and in addition to the flexibility offered by freelancing, the expectation of higher income is another critical factor in their decision. Among the pool of Millennials planning to quit their job within two years, 62% consider the gig economy as an opportunity to grow their income, the survey found.
Research suggests that these expectations are not baseless. A survey conducted by Payoneer indicates that the average American freelancer makes $31 per hour, which is 17% higher than the average for full-time employed professionals.
The Dark Side Of The Gig Economy
• Unpredictable income: Irregular income is one of the primary challenges freelancers face around the world. A Paypal report found that nearly 46% of U.S. freelancers find it difficult to deal with unpredictable income. It is critical to note that these figures are higher for freelancers operating in countries like Hong Kong, Russia and South Africa. There is no doubt that freelancing comes with impressive perks, but the lack of a reliable income source could pose serious challenges, especially for those with higher financial obligations.
As freelancers, it is crucial to set up a framework to vet every client and do proper background research before commencing work. Similarly, freelancers can opt for escrow services or freelancing platforms that offer payment protection.
• Not saving enough for retirement: The U.S. retirement crisis is a stark reality that many Americans face, and freelancers are no exception. A 2016 report found that as many as 40% of self-employed Americans are not saving for retirement. Nearly 38% of freelancers cite insufficient income as the primary reason for failing to save for retirement, followed by 31% who cite irregular income as the primary reason.
How Freelancers Can Handle Irregular Income And Retirement Savings
Freelancers can manage irregular income by saving more during their peak seasons. They can start by creating an emergency fund and aim to save at least 25% of their income. As freelancers, it is critical to observe discretionary spending and control it.
When it comes to saving for retirement, freelancers have multiple options including traditional IRAs, SEP IRAs and Solo 401(k) retirement plans. Their annual contribution limits are $6,000 for traditional IRAs, $56,000 for SEP IRAs and up to $62,000 for Solo 401(k) plans including catchup. For freelancers with higher earning potential, these plans can help boost retirement savings.
Additionally, freelancers can look into alternative investments for retirement savings. Self-directed IRAs and self-directed Solo 401(k) retirement plans facilitate alternative investments, such as real estate, precious metals, mortgage notes and even digital currencies. Having real estate or mortgage notes in their retirement portfolio can help provide consistent growth in retirement savings through passive rental and interest income as well as appreciation.
Freelancing is a promising proposition in this rapidly changing employment landscape. However, freelancers must be aware of the benefits as well as risks associated with the profession. Careful financial planning is critical for these gig economy heroes.
The information provided here is not investment, tax or financial advice. You should consult with a licensed professional for advice concerning your specific situation.