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Take it from me, I’m a freelancer – this method of work has some benefits. For example, freelancers can work for multiple clients, thus diversifying their income stream.
Plus, there’s the obvious freedom and the perk of avoiding office politics. Speaking of avoiding the office, freelancers that work from home can cut back on other work-related expenses. Personally, I can’t remember the last time I used a dry cleaner for my nice clothes. I’ve also spent the last 17 years living in two states with some of the highest gas prices in the country, but I’ve never complained because I don’t have a daily commute.
However, like everything else in life, there are tradeoffs with freelancing. Combining my personal experience with conversations I’ve had with freelancers in other industries, chances are as a freelancer you get none of the following: A holiday bonus, employer-offered healthcare and access to an employer-sponsored retirement plan.
Alright, so maybe bonuses are a relic and healthcare, well that’s a topic I’ll address another, but the point here is advisors can really help freelancers when it comes to retirement planning. Chances are many of them need that help.
Why Freelancers Merit Attention
Over the past several years, the notion of gig work has gained momentum, but advisors should note there are big differences between side hustles and W9 contract work – the latter of which can be found in highly professional settings and with some workers earning handsome pay.
As for the opportunity set for advisors, consider the following. It’s estimated that freelancers make up 37% of the U.S. workforce, combining for $1.3 trillion in earnings power. Additionally, freelancing isn’t reserve for young people. More than half of those engaging in freelance work are baby boomers or Gen Xers.
“Those percentages are only growing. So we're seeing more and more very experienced people coming into the freelance pool,” notes Susan Hirshman, a director of wealth management for Schwab Wealth Advisory and the Schwab Center for Financial Research. “And especially those people who really enjoy what they do, they're not ready to leave their industry completely, and they have strong networks where they can apply their skills. I'm not seeing them necessarily retiring 100%. Instead, a term I hear being used among these kind of retirees is that they have a "portfolio of opportunities."
Hirshman points out some of the reasons why advisors and freelancers are an ideal match, including freelancers’ vulnerability to inconsistent earnings patterns, lack of access to employer-sponsored retirement plans and lack of knowledge on how to set up retirement plans themselves,
“As you can imagine with freelancers, their cash flow can be really lumpy, meaning that they can have great earnings some months or even some years and perhaps lighter earnings at other times,” she adds. “So often people get the feeling that they may not be able to afford to save for retirement, and they want to wait until that perfect time, which often comes way down the road if it comes at all.”
Advisors Should Help Freelancers Get Over the Hump
It’s common for freelancers to delay saving for retirement, opting to conserve cash for rainy days (or months), but that also leads to missed opportunity.
In other words, advisors should help clients get over the retirement savings hump and articulate to them the value in saving for retirement today, even if only in incremental fashion. Chances are once those clients start doing it and seeing the fruits of those labors, they’ll remain committed and possibly boost retirement savings over time. Fortunately for advisors, it’s easy to drive home these points to freelancer clients.
“You can save $6,500 for 2023, an extra thousand if you're over 50. And so that's pretty good when your income is low. And over time, when your income grows, you can start a solo 401(k) plan, for example, where you can contribute up to $66,000 for 2023 or $73,500 if you're over 50. So big differences can occur. So evolution is the key,” concludes Hirshman.
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