Back in Grandpa’s day, they had pensions to fund their retirement. By the time your parents were working, they had 401(k) accounts with employer matching contributions.
Today, many Americans piece together their income through a variety of side hustles. They might or might not have a full-time day job, and often lack access to traditional workplace benefits altogether.
So how can these workers balance the needs of the moment with their future retirement planning? The key lies in that final word: planning. Here’s how you should balance your financial life now and save for retirement later.
Set a Target Timeline and Nest Egg
It’s hard to get anywhere if you don’t know where you want to go, so it’s best to start with a target number and a timeframe for reaching it.
“Work backwards,” said Paul Gabrail, multi-millionaire and host of the Everything Money show. “Ask yourself, what do you need in retirement?”
Take your target monthly income in retirement and multiply it by 12 for an annual income amount, then multiply that by 25. That’s how much you’d need as a nest egg, if you follow the classic 4% retirement rule — which is withdrawing 4% of your nest egg in the first year of retirement, then raising that by the inflation rate each year.
Now that you have a target number, set a timeline. When do you want to reach financial independence, and become work-optional?
From there, you can calculate how much you need to save each month to reach your goal. You don’t need to do the math yourself — start playing with a retirement calculator to get a sense for the numbers.
Start With Security
It’s hard to plan decades ahead when you’re struggling to pay this month’s bills. Gig economy workers often struggle with budgeting, given the variability in their income.
Melanie Musson, personal finance expert with InsuranceProviders.com, recommends starting with an emergency fund to stabilize your finances. “When you depend on side hustle income, you have to focus on building a robust savings account because your income is not stable or secure.
If you lose side hustle income, you need to be able to pay your bills and maintain your lifestyle until you can pick up another side gig. Start by building a solid six months’ living expenses in savings. Once you have that cushion in place, you can focus on building your retirement savings.”
Funnel Savings in Your Strong Months
Variable income from side hustles might mean lean months and plush ones.
In the lean months, you can draw a little from your emergency savings if needed. But too many gig workers then turn around and splurge in their strong months.
“You might not save a consistent amount every month, but you can make up for it when you have good income months,” said Musson. “Balance your now and later by prioritizing savings in your good months.”
Look for Painless Budget Hacks
Housing makes up the largest expense for most households. If you can slash or eliminate your housing costs without making yourself miserable, it can free up a huge amount of money for retirement savings.
“House hacking involves renting out extra bedrooms, or buying a small multifamily property and renting out the other units,” said Ryan Barone, CEO of RentRedi. “Alternatively, you can rent out storage and parking spaces if you have extra space in garages, driveways, yards, attics, basements, and storage sheds. Or if you have an expansive, nicely landscaped yard, consider renting it out for parties, events, photoshoots, or filming locations.”
You could even rent out your entire home on Airbnb sometimes, and crash with a friend, family member, or significant other.
Look for relatively painless ways to spend less, so you can funnel more toward retirement.
Don’t Assume Your Job or Gig Will Always Be There
The only constant in life is change — and our economy is evolving faster than ever before. Old jobs become obsolete, as new ones emerge. Automation and AI are only accelerating that turnover.
What’s your plan, if your side gig disappears tomorrow?
For that matter, your day job doesn’t come with a guarantee either. Economic change aside, three in five workers over 50 feel discriminated against in the workplace, according to a study by AARP. And that discrimination doesn’t stop at generational jokes, either. Over a fifth (22%) of workers over 50 report being pushed out of their jobs.
Plan for uncertain times ahead, because any source of income can disappear at any time.
Reframe From Retirement to Ideal Work
People who labor in a mine all day probably count the days until their retirement. But what about people who work a calling, ideal work that fills them with passion and purpose?
These workers want to continue as long as they possibly can — which means they’ll keep earning longer. “Personally, I never want to fully retire, out of passion for what I do,” added Gabrail. “It’s nice to choose to work instead of having to work.”
Many workers feel a golden handcuff however. They continue doing work they don’t love because it pays well, while their ideal work pays less.
So? Build a little passive income to supplement the paycheck from your ideal work. Bond interest, stock dividends, rental income, and distributions from passive real estate investments all offer a little extra income to help you ditch your day job sooner. You can start living your ideal life now, rather than some vague, far-off retirement.
Work a Post-Retirement Gig To Avoid Sequence Risk
Sequence of returns risk is the risk of a major stock market crash early in your retirement. It has a far greater impact on your portfolio than an equivalent crash later in your retirement.
“One big risk new retirees face is a decline in their assets early in retirement since withdrawals have a magnified impact on their balance. For example, a $20,000 annual withdrawal is 4% of a $500,000 portfolio, but would be a 5% reduction if that same $500,000 had declined by 20% to $400,000,” said Tom Buckingham of the Nassau Financial Group.
Some retirees guard against sequence risk with a huge cash cushion. But that leaves your cash losing value to inflation, and failing to earn a return.
Instead, postpone withdrawing much money from your nest egg by working a side hustle in retirement. Certified Financial Planner Scott Sturgeon of Oread Wealth pointed out the many benefits. “A semi-retirement gig can help older people not just earn additional income, but also foster social connections and create a sense of purpose,” he said.
It all comes back to doing work you love, because you’ll never want to stop.
Source: GOBankingRates
