Retirement Planning on an Inconsistent Income

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Updated on Monday, November 10, 2014

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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