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Strategies to Save

Retirement Planning on an Inconsistent Income

Man Paying Bills With Laptop

As a freelance writer and professional theatre actress, I often find myself getting caught up in the financial stress of paycheck-to-paycheck living. Money revolves far more around remaining fiscally solvent until the next gig or contract than it does around long-term goals like savings and retirement.

Unfortunately, much of the financial planning advice and literature doled out by top money pros rests on the assumption that everyone is operating on traditional, reliable, and consistent sources of income- often overlooking the needs and realities of freelance and gig-to-gig workers like myself, an increasingly growing sector of the workforce.

According to the Freelancers Union, one-third of US workers are now in non-traditional, impermanent jobs. The independent labor force is projected to continue growing 6 percent annually over the next five years, which means the old retirement plan of social security, pension, and employer sponsored 401(k) no longer serves as a one-size-fits-all strategy.

While freelancers and gig-to-gigers earn money differently from traditional employees, their retirement goals are similar. But without employer sponsored retirement resources or a steady and predictable paycheck, the formula for effective retirement planning requires a new approach.

Get grounded in expenses

Those with unpredictable incomes may have trouble estimating their monthly earnings, but they should have a clear idea of their monthly cost of living. While income fluctuates, expenses (for the most part) are fixed.

Inconsistent income earners need to remain grounded in their monthly living costs and incorporate retirement savings into that number. If funding retirement is not made a priority, as non-negotiable as housing and food expenses, surplus money will likely go toward other discretionary expenses, bringing available funds to zero before retirement savings get funded.

Commit to earning enough

Setting aside ten percent of each paycheck for retirement is a fairly standard recommendation among personal finance experts. To ensure that a ten percent retirement contribution won’t create a situation in which basic needs cannot afford to be met, variable income earners must commit to a threshold level of earnings that covers both the cost of basic monthly expenses and long-term retirement savings.

For example, if you calculate that your monthly cost of living is $2,000, add an additional ten percent to that number- in this case, $200+$2,000= $2,200- and commit to earning at least that much money per month.

In particularly challenging circumstances or tough financial times, that percentage can be temporarily scaled back. The key is to develop and commit to a habit of consistent retirement contributions in spite of inconsistent income. Even small and seemingly negligible savings can reap large rewards through the powerful combination of compound interest and time.

Know your resources

To make the most of their retirement savings those with fluctuating income should be well versed in retirement account options. Many will not have access to traditional, employer sponsored 401(k) plans, but there are plenty of excellent alternatives.

  • Individual 401(k): An individual 401(k) allows the self-employed to contribute up to $17,500 in pretax dollars in addition to 25 percent of their annual earnings (up to $52,000). Contributions can also help reduce current tax liabilities for freelancers who have the added responsibility of setting aside their own tax payments. 
  • SEP-IRA: The simplified employee pension allows the self-employed to contribute 25% of their net earnings to retirement, with a cap of $52,000. This plan is beneficial for those with unpredictable income as there is no minimal annual contribution and it allows users the flexibility to change their contribution amounts each year.
  • ROTH IRA: Anyone with an adjusted gross income below $114,000 can contribute up to $5,500 to a ROTH IRA annually. For variable income earners hesitant to part with their potentially necessary cash, the ROTH IRA allows for tax and penalty free withdrawals from the principal- though dipping into retirement savings should be avoided if at all possible.

Plan for retirement, regardless of income

According to a report from the Employee Benefit Research Institute and Greenwald and Associates, 60 percent of workers have less than $25,000 in savings and investments that could be used for their retirement and 36 percent of workers have less than $1,000 stashed away! That means the majority of Americans have just enough money to sustain through one year of retirement before running out of money, if that.

The two most important reasons people give for not contributing more to their retirement savings are cost of living and day-to-day expenses. Add to that the challenge of unpredictable and inconsistent income and retirement planning goes from challenging to seemingly impossible.

As an actress and freelance writer I have taken on this seemingly impossible challenge by prioritizing my retirement contributions, building those contributions into my budget, and diversifying my income streams so that I can always be earning enough to fund both my necessary life expenses and my future financial goals.

Without a steady paycheck or employer contributions to rely on, freelancers, independent contractors, and other variable income earners need to take it upon themselves to remain proactive in planning and prioritizing their retirement- be they artists, architects, or entrepreneurs.

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Advertiser Disclosure: The products that appear on this site may be from companies from which MagnifyMoney receives compensation. This compensation may impact how and where products appear on this site (including, for example, the order in which they appear). MagnifyMoney does not include all financial institutions or all products offered available in the marketplace.

Stefanie O
Stefanie O'Connell |

Stefanie O'Connell is a writer at MagnifyMoney. You can email Stefanie at [email protected]

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Pay Down My Debt

The Reality of Six-Figure Debt on an Actor’s Salary

 

Stefanie acting_lg

By Stefanie O’Connell, TheBrokeAndBeautifulLife.com

Freddy Arsenault is a Broadway actor with six figures of student loan debt, thanks to the MFA acting program at NYU’s Tisch School of the Arts. Among actors, Arsenault is one of the “lucky ones”. According to Actors Equity Association, the professional theatre actors union, fewer than 15 percent of due paying members are able to secure work in any given week and only 17,000 of 40,000 members work in a given year. Of those jobs, only a select few carry the prestige and paycheck of a Broadway show.

Even with his success though, Arsenault doesn’t have the luxury of sitting back and “living the dream”. In fact, to keep up with the cost of New York City living and his student loan payments, Arsenault also works as a real estate agent. By continually supplementing his acting income, Arsenault has been able to contribute $800 a month to his $165,000 student loan bill since graduating in 2008. Thanks to interest, however, his monthly contributions haven’t even made a dent in the amount he owes, which still stands at $165,000.

Arsenault’s story is a powerful reality check for actors, artists, freelancers, and young people everywhere who suffer from the misconception that all of their financial woes will dissolve when they “make it”. Even the “dream job” can’t serve as a panacea for fiscal hardship or erase the need for a well-constructed financial plan.

What Happens When You Don’t Pay Up?

A 2014 poll by American Theatre Magazine revealed that 17 percent of artists are paying nothing towards their student loan bills each month- perhaps operating under the flawed assumption that the big career opportunity, should it ever arrive, will serve as the answer to their five or six figure debt. Unfortunately, this policy of postponement and willful ignorance can prove quite damaging.

If you become delinquent on your loan repayment for more than 90 days, your lender(s) will report your tardiness to the credit bureaus, nose-diving your credit score by as much as 100 points. Letting that delinquency fester will only result in further consequences- like default. At that point your loans are likely to be turned over to a collections agency and your entire balance will become due immediately. If you thought $800 monthly payments were rough, try coming up with 80 grand on the spot!

Taking Back Control

Rather than dealing with debt collectors and struggling to raise five or six figures overnight to repay your student loans like some kind of Mafioso, confront your bills head on by putting a realistic plan in place.

Start by calling each lender and negotiating. Asking for reduced interest rates or lower monthly payments is a far better strategy than letting the bills stack up in the corner and keeping fingers crossed for overnight stardom and millions.

The trouble many artists run into in the construction of a debt repayment plan is finding an amount to contribute towards their debt that will actually fit within their budget. The American Theatre Magazine poll found that 67 percent of the 500 artists surveyed made less than $25,000 (if anything) from theatrical endeavors in 2013. Without a livable or reliable source of income, it’s a struggle for these artists just to get through the month, let alone make a dent in six-figure debt.

For these individuals, the Income Based Repayment program might provide a sustainable solution. The IBR program limits monthly payments to 15 percent of disposable income and extends the repayment term to 20 or 25 years. To qualify for the program, individuals must prove “partial financial hardship”, i.e. evidence that minimum payments on federal loans are more than 15 percent of their income each month- not a problem for most artists. After 20 to 25 years of making payments using the IBR program, any remaining debt is forgiven (though taxes must be paid on that amount).

Unfortunately, the IBR plan is only available for Federal loans and the extended pay back period means paying a lot more in interest over the life of the loan. Artists using IBR payments are likely to find that their contributions barely cover the interest each month and don’t even touch the principal. In other words, despite their payback efforts, the total amount owed will continue to increase each month.

Diversifying Income Streams

As an alternative, artists and other low wage earners might want to consider implementing Arsenault’s approach- diversifying income streams to make more money.

That doesn’t just mean “survival jobbing” as a waiter to get to the next paycheck. It means establishing a substantial and reliable stream of additional income to cover basic living expenses, make significant contributions to debt payoff, and save for future financial goals.

Of 7,093 theatre graduates surveyed by the Strategic National Arts Alumni Project between 2011 and 2013, 10 percent said they left the field because of debt and 26.9 percent left because of higher pay in other fields.

Committing to earning enough money to fund expenses, debt pay off, and savings breaks artists free of the short-term, stress inducing cycle of living paycheck to paycheck and gives them long-term financial sustainability- making “burnout” significantly less likely.

People go into the arts to do what they love, but the strain of student loan debt addressed with short-term, band-aid strategies can quickly turn that joy into depression and resentment. Tackling debt head on with a viable long-term strategy is not only empowering financially, but also freeing artistically in that it allows for the continued pursuit of passion.

Advertiser Disclosure: The products that appear on this site may be from companies from which MagnifyMoney receives compensation. This compensation may impact how and where products appear on this site (including, for example, the order in which they appear). MagnifyMoney does not include all financial institutions or all products offered available in the marketplace.

Stefanie O
Stefanie O'Connell |

Stefanie O'Connell is a writer at MagnifyMoney. You can email Stefanie at [email protected]

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