Gig And Older Workers Need To Take Control Of Their Retirement
Several retirement trends have been brought into focus by the COVID-19 pandemic. One of the most disturbing is the number of workers between 50 and 65 who are in jobs without retirement benefits. Today half of all workers don’t have access to a work sponsored retirement plan.
According to a recent study by Alicia H. Munnell and her colleagues at the Center for Retirement Research at Boston College, one-fifth of American workers in the 50 to 65 cohort are in non-traditional work arrangements. Matthew S. Rutledge, also at the Center for Retirement Research, estimates that a third of that group doesn’t have health insurance or a retirement account.
Professor Munnell’s analysis revealed that fully half of older Americans in no-benefit jobs stay in those jobs for years. Only 26 percent have used no-benefit jobs as a stop-gap between full-time jobs with benefits. One intriguing statistic: 24 percent of workers in non-traditional, no-benefit jobs have college degrees or higher.
It seems likely that new work arrangements, like remote work for full-time employees, will also increase the number of non-traditional, “1099 jobs” aka Gig workers. As the pandemic realigns the labor market in the U.S., the necessity for individuals to be aware of and plan for retirement will only increase.
The potential negative economic impacts of this trend are significant: Professor Munnell estimates that workers in nontraditional jobs for the duration of their fifties and early sixties will save 26 percent less than their peers who were in full-time jobs with a 401(k) plan.
The reason why these workers, who may make a significant amount of money as freelancers or consultants, either don’t have retirement plans or under fund them is clear: independent contractors have enough on their plates without having to do the hard work of planning for retirement.
The IRS has several plans for the self-employed to save for retirement, but picking one is just the first step. After you have a plan, calculating your contributions to it to minimize your tax liability is complicated, especially if you are trying to use several different software tools to manage planning and contributions.
Decades of research into behavioral economics and finance has shown that the more complex operations become, the less likely people are to sit down and think through the implications. More often, we use mental shortcuts (called heuristics in the academic jargon) to make our decisions — sometimes with disastrous, unintended results.
Very human traits like loss-aversion, hyperbolic discounting and the endowment effect mean savers are often too conservative with investment risk but also more likely to spend the money they have; reasoning they might not have it in the future anyway (perhaps due to inflation).
The Policy Solution
Economists and policymakers have designed retirement plans to compensate for our inability to save for retirement. The first and most important of them all is still Social Security. But Social Security was designed during the height of the labor movement when workers had more leverage over their employers, and companies offered generous pensions to life-long workers.
Beginning with the Employee Retirement Income Security Act (ERISA) of 1974, the next wave of retirement policy shifted the burden of saving to individuals and away from government or business. The move has been good for asset managers and financial planners, but not, perhaps as good for individuals, especially those in non-traditional work arrangements.
The Obama administration recognized the need for a simple, government-sponsored retirement plan that would be both portable and affordable and so it created the myRA program in 2015. Unfortunately, not many people adopted the plans, and the Trump administration shut the program down in 2017.
Some states, like Oregon and Illinois, have state-level plans that are like the myRA, but as Professor Munnell told NPR, “without a mandate, without somebody saying, ‘Mr. Small Businessman, you have to do something for your employees,’ I don’t think we’re going to see much change.”
Even though a “government option” like the myRA could significantly help the growing number of non-traditional workers who don’t have strong ties to their employers, without a profound political realignment, it seems unlikely that legislation will pass any time soon.
Better Tools, More Awareness
Technology developed over the last decade based on the principles of behavioral economics has attempted to fill the gap left by politicians. You can link your bank and investment accounts to free retirement planning software that will model your retirement preparedness. And designers are building in features to help savers make better decisions intuitively.
Better technology has also lowered the cost of investing, so long as investors are smart about keeping advisors’, transaction and fund fees low. The trend toward low- to no-fee retirement products has accelerated over the last few years, and the widespread adoption of low-fee investment vehicles like ETFs has reduced the cost of investing.
The next technological innovation will capture the demand for retirement advice needed by workers in non-traditional, “1099 jobs” by making it easier and less costly to prepare for the future.
For now workers who find themselves without a work sponsored plan can create their own solution:
- Build a retirement plan
- Save & invest regularly (ideally > 15% and over a long period of time to take advantage of dollar cost averaging)
- Leverage pre-tax savings vehicles such as an IRA or Solo 401K
- Keep investment fees low
- Re-balance regularly
- Engage a fee only / hourly financial advisor who is a fiduciary if you need extra help