The gig economy is growing rapidly in the United States, and with it a mounting retirement crisis. Today, seventy-percent of all independent contractors report having no long-term retirement savings. If that percentage remains constant while the gig industry’s growth projections hold true, by the year 2020, forty-percent of the American workforce will be employed in the gig economy sector, and forty-two million Americans will have inadequate retirement savings. Due to the nature of their employment status, freelancers are unable to participate in defined contribution/benefits plans to which W2 employees have access. This, coupled with a historic lack of financial education and unawareness of alternative retirement savings options, has resulted in an impending retirement disaster.
Although alarming, the looming retirement crisis can still be solved. Ironically, the same type of disruptive technology that has allowed the gig economy to flourish can also be utilized to help solve the retirement needs of its workers. Digital wealth management services, commonly referred to as robo advisors, offer low-touch algorithmically derived financial planning and investment management that is optimized for scale, fees, taxes, and a client’s personal financial situation. These characteristics make robo advisors ideally situated to solve the retirement challenges that face freelancers.
Unlike W2 workers, contractors inherently cannot participate in defined contribution plans. This prohibits freelancers from scheduling payroll deductions and reaping the associated tax benefits. Robo advisors in partnership with gig economy firms can provide auto deposit features to workers and tax efficiently manage their portfolio.
Historically, 1099 workers are unaware of their unique retirement account savings options, such as Simple IRAs, SEP IRAs, and Solo 401(k)s. Furthermore, workers are unsure of how to best approach and prioritize their financial goals. Robo advisors can provide easily accessible personal finance webinars and online finance education courses. As robo technology continues to evolve, robos will be able to recommend the most appropriate financial goal and retirement account for a worker based on their entire financial situation.
Typically, contractors’ seasonal, fluctuating, or irregular income streams make it difficult to set aside money for retirement. Algorithms employed by robo advisors can analyze the patterns and trends in a contractors’ earnings and provide auto deposit / retirement goal recommendations. Furthermore, they can let contractors know how much they should be saving and if they are investing correctly.
For years, independent contractors have been undeserved by the financial services industry. Robo advisors’ low to no account minimums allow almost all contractors to participate in retirement planning and access professional investment management. Just like how the disruptive technology of gig economy jobs has reshaped the workforce, the technological innovations of digital wealth management services can reshape their retirement landscape.
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