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Helping your clients navigate the gig life
Kate Ashford, 08/23/2019
From millennials to pre-retirees, a healthy segment of the professional population—roughly one-third—maintains a side gig
or works full-time in the so-called gig economy.1 Whether it's a part-time income stream or a lucrative consulting career, managing freelance income can be more complex than a traditional salary, making your role as an advisor even more important.
These clients' goals may be unique as well; for instance, access to affordable healthcare tops saving for retirement as a top freelancer concern.1 All of this can lead your clients to lean on you more heavily for guidance around retirement savings and other financial objectives. And if they're not already leaning on you, chances are, they should be.
Here are a few areas to focus on that can add value to your relationships with gig-working clients.
Smoothing erratic cash flow
For someone working in the gig economy, all roads lead back to cash flow. “They really must understand what they need to live off of," says Diane Pearson, an advisor with Legend Financial Advisors in Pittsburgh. “By understanding how much they need, they can set all types of different goals for themselves."
Estimating cash flow can be difficult for gig workers used to a feast-or-famine workflow. This is where you can help. Kevin Griffin, principal of Griffin Financial Planning in Boston, suggests starting with expenses. In some ways, this is similar to basic retirement planning, he says. “In retirement, most folks want to maintain their current lifestyle. In order to do that, they need to know how much they're spending now so they can continue to do that in the future." For those working in the gig life, how much they're spending can inform how much they should be saving, and how much they need to make each month to stay on track.
Griffin recommends giving clients an 80/20 rule: live on 80 percent of their take-home pay and put the other 20 percent toward other goals, such as debt payoff, short-term savings and retirement. “It's a good starting point," he says.
Technology can help independent contractors keep an eye on cash flow, too. “Mint.com is the big one, and now a lot of banks have their own budgeting tools, or you can create categories and label different transactions," says Jim White CFP®, president of J.H. White Financial in Pottstown, Pennsylvania. “No one likes to budget—it's tedious and it's a pain—but at least there are apps and software that can automatically record transactions."
Balancing now and later
Having an emergency nest egg at the ready is essential for everyone, but it's especially true for the self-employed. You may need to help clients find the money in their budget to create and prioritize emergency savings.
“Most financial experts suggest having at least six months of living expenses saved and immediately available—that is, not in a retirement account," says Dani Fava, director of innovation for TD Ameritrade Institutional. But there's an additional layer of complication for gig-based employees. Some may work in professions that are seasonal, Fava points out, and budgeting and financial plans must account for that. They may need to save more during the busy season to ensure that they're adequately prepared for slower times.
Retirement can be even trickier for gig workers. Not only do they need to budget carefully in order to set aside contributions, but without an employer offering a plan, they also need to determine which retirement account they should be using to invest their funds. Just 16 percent of gig workers have assets in an employer-sponsored plan, meaning 84 percent need to figure it out on their own.2
“We call it a do-it-yourself retirement," says Jim Poolman, executive director of the Indexed Annuity Leadership Council. “If they don't take control of their own retirement, no one else is going to."
This is another area where you can add a tremendous amount of value as an advisor. “The nature of the gig economy is that there's no guarantee or expectation of future work," says Fava. “I imagine it's very difficult when you're worried about whether or not you'll have work next week, to also worry about retirement savings."
For many gig workers, getting started is the biggest hurdle. At the very least, consider recommending your gig working clients set aside money in a traditional or Roth IRA—up to $6,000 in 2019, and up to $7,000 if they're 50 or older.3 If they're able to save more than that—and you should work with them to eventually make that possible—they can consider a Solo 401(k), SEP IRA or SIMPLE IRA, all of which are also tax-advantaged options.
Reminder: Higher-earning clients—$122,000 for an individual, $193,000 for a married couple—may not qualify for a Roth.4
“There are some fine lines for which account is better in certain situations," White says. Helping them choose is one way you can clearly show your value.
No matter the account type, Pearson recommends having clients look at gig paychecks the same way you would look at a biweekly or monthly paycheck from an employer: Automatically take a portion of each paycheck and put part of it into regular savings and retirement savings. “At the end of the year, if they haven't had to tap those [regular] savings, they can move it over to the IRA," she says.
Navigating insurance options
Benefits like disability and life insurance are especially important for freelancers. Not only do these workers lack access to employer plans, but many lack sick leave and other traditional safety nets full-time workers take for granted.
“I wouldn't marry my husband until he had a disability policy," Pearson laughs. “He's in the construction business and he's self-employed." Sure enough, when the couple was expecting their first child, a wall fell on her husband, and he ended up with a herniated disc that put him out of work for a year. “It was a tough year, and that disability policy really helped us get through it," she says.
Even if you don't offer insurance via your firm, consider partnering with an insurance broker or taking some courses to put you in a position to educate your clients about how insurance can be incorporated into a financial plan. For instance, if a client has benefits at one job, that employer disability coverage usually only replaces a percentage of their income. That policy wouldn't help replace income from any side gigs that may be affected. “Plus, if the employer was paying the premium, you're taxed on top of that," Pearson says. “I always encourage an outside disability policy, and if you're jumping from job to job or self-employed, it's going to go with you anywhere."
The same goes for life insurance. If a client's death would leave loved ones saddled with major expenses—a mortgage, car loan, childcare, funeral costs—they should have a large enough policy to cover those costs. Similarly, if they have heirs who are relying on their income to live or to pay for future expenses, such as education, they should have a policy. Says Pearson: “An advisor can help clients evaluate their situations and only buy the policy they need."
Your value add
Not only are gig workers in a unique situation compared to other clients, but it's also likely they're more reliant on guidance from their advisor in terms of how to plan, and which accounts and policies to use. For this clientele, you may want to undertake more of a financial planner role than with some other clients. If that's not a service you focus on, you might consider having partners or resources available that fill this gap.
For many, gig work can become a lucrative career. Consider high-end interior designers or marketing consultants who make a considerable income but still find their salaries fluctuating. Advisors who recognize that gig work is more than a stopgap or a path chosen by 20-somethings can build services that cater to the unique needs of freelance-style workers. Those who do it well may discover a new niche.
1 “5th Annual Report: Freelancing in America 2018," Upwork, Oct. 31, 2018. (Found here: https://www.upwork.com/i/freelancing-in-america/2018/)
2 “Gig Workers in America: Profiles, Mindsets, and Financial Wellness," Prudential, 2017. (Found here: http://research.prudential.com/documents/rp/Gig_Economy_Whitepaper.pdf)
3 “Retirement Topics - IRA Contribution Limits," IRS, Nov. 2, 2018. (Found here: https://www.irs.gov/retirement-plans/plan-participant-employee/retirement-topics-ira-contribution-limits)
4 “Roth IRA Eligibility," RothIRA.com, 2019. (Found here: https://www.rothira.com/roth-ira-eligibility)
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