Retirement planning for the gig economy

Retirement is becoming more and more fluid, with many retirees choosing to work and feel economically purposeful well beyond the formal retirement age of 65. The exciting gig economy, originally the domain of millennials, is proving to be perfect for retirees seeking a softer transition from full-time employment to full-time retirement.

The gig economy is characterised by flexible, freelance and on-demand work and is often supported by digital platforms – think Uber, Airbnb and sitters4u.co.za. Typically, workers in the gig economy find jobs by registering on a website or through an app, and it turns out that the gig economy is perfect for retirees wanting to remain engaged and earn extra money on their own terms and in their own time. As it currently stands, 70% to 80% of Americans intend working after retirement and over 30% of the US workforce is made up of freelance workers. This number is expected to rise to over 50% by 2027. 24% of Uber drivers are over 50, more than a quarter of pet-sitter service Rover.com is over 50, and Airbnb says its most successful and fastest-growing group of hosts consists of women over the age of 60. The continual rise of digital platforms is generating more and more creative ways for retirees to generate income and contribute meaningfully to the economy well past the traditional retirement age.

What makes the gig economy appealing to retirees?

The gig economy allows retirees to gradually transition from formal retirement while remaining engaged and active. Besides for providing retirees with a platform to make extra money and boost their retirement savings, opportunities in the gig economy enable retirees to master new skills and participate meaningfully in the economy for a longer period of time. This in turn enables retirees to remain physically and mentally active while at the same time reducing the risk of boredom, depression and illnesses associated with a sedentary lifestyle. The gig economy is particularly appealing to older people who are frustrated by the age discrimination they often face when applying for traditional jobs. In fact, the gig economy has torn down the barriers to entry and significantly leveled the playing fields. For retirees operating in this space, there is no limit to what they can earn other than the time they have available. Flexibility and autonomy over their time is hugely appealing to many retirees who are now able to work when they want to and not when they have to.

Opportunities in the freelance economy are seemingly endless, with innovation constantly producing new ways for literally anyone with an internet connection and some tech-savvy to generate an income.

Through digital platforms and social media, retirees find it much easier to market their skills or business idea than through the formal methods of yester-year. Whether it’s advertising a granny flat, registering a guest house on Airbnb or starting an online retail venture, retirees are finding it easier now than ever before to gain marketing traction for their business ideas. There are literally apps for everything from dog walking, to selling property, to online tutoring on every imaginable topic.

What do retirees need to participate in the gig economy?

Although the gates are open for anyone to participate in the gig economy, retirees will require physical and mental dexterity to keep pace in an economy that evolves at a rapid pace. Remaining up-to-date with advances in technology is essential to remaining relevant. And it goes without saying that understanding how the various elements of social media can be harnessed to grow and market one’s offering is an essential skill. A significant advantage that many retirees have when entering this economy is a strong network of friends and ex-colleagues, many of who have sound business acumen as well as money to spend; and retirees would do well to cultivate and care for these networks. Financial acumen, good time-management and self-motivation are important attributes when operating in an economy that is designed for the self-starter. Lastly, and most importantly, retirees should be prepared for change. The ability to adapt, transform and re-position one’s product or service offering in an economy born out of disruption is key to survival.

What are the short-comings of the gig economy?

The nature of the freelance economy means that income may be irregular and unpredictable, making it difficult for participants to track and manage earnings. In the first few months and years of business, forecasting and projecting may be challenging, so careful capturing and monitoring is needed to establish reliable data and business trends. For those entering the gig economy after years in a corporate, the absence of group benefits such as retirement funds and medical aid may be disconcerting, and mechanisms will need to be put in place to replace these benefits where necessary.

Many retirees who enter the gig economy are tempted to dip into their accumulated retirement funds to help fund the set-up of their new venture or to cover their income for the first few months of business. This is a fine balancing act and there is no definitive answer, although seeking the advice of a financial advisor would be the best approach, bearing in mind that there may be tax implications to consider.

Financial advice for retirees in the gig economy

For retirees operating in the freelance economy, careful financial and business planning is required to ensure that all areas of risk are protected, and that accumulated retirement savings are not jeopardised. Specific areas of financial planning that need to be covered include:

  • Going it alone after years of formal employment may mean that critical protection such as life and disability cover will need to taken out in one’s personal capacity. It is important to bear in mind that personal insurance is generally more expensive than group cover, and this needs to be budgeted for in the planning process.
  • With medical inflation far outstripping CPI and with deteriorating state medical facilities, remaining on a medical scheme is essential. Once again, moving from formal employment may mean losing a medical aid subsidy or a group gap cover benefit, and replacing this cover should be a priority. It is essential to ensure that there is no break in medical aid membership as any break may result in exclusions or waiting periods being imposed upon re-joining.
  • With an irregular income and possibly multiple sources of income, it is advisable to seek tax advice to ensure that the business and drawings are structured in the most tax-efficient manner.
  • To keep pace with this vibrant economy, it will be necessary to invest both in oneself and in technology. Our advice is to ensure that up-skilling and re-skilling is budgeted for, and that adequate funds are set aside for technology upgrades.
  • The change from having a single salary paid after-tax into one’s bank account at the end of each month to possibly having multiple payment transactions taking place every day is significant. Careful budgeting and financial management are essential, and it is worth investing in appropriate software to manage inflows and outflows. Disciplined record-keeping is vital where customers regularly pay for goods and services in cash. Offers to be paid ‘in kind’ or requests from family and friends for discounts can negatively affect cashflow, and these are sensitive issues that should be considered and dealt with at the outset.
  • Given the erratic nature of earnings in the freelance economy, it makes sense to build up substantial reserves in an emergency fund. The general rule-of-thumb for those with a fixed income is to save between 3- and 6-months’ worth of expenses in an emergency fund. However, in a situation where income is erratic and unpredictable, it would be wise to increase the size of one’s emergency fund to between 6- and 12-months’ worth of expenditure, including the costs of keeping the business running.
  • Depending on the scale of the venture, it may be necessary to prepare a business plan. When setting up a new venture, it is always tempting to dip into accumulated retirement savings to assist with set-up costs and replace lost income while the business is still young. Having a business plan in place allows one to do careful forward-planning and make well-calculated financial decisions.
  • Retirement fund monies generally cannot be accessed before age 55, and it therefore makes sense for retirees to ensure that some of their investments are liquid and easily accessible. Investments such as money market funds and unit trusts are ideal investment vehicles as they can be accessed easily and at short notice. Having said this, there are CGT and tax implications in respect of these investments and it is important to find the right balance between investment flexibility and tax-efficiency.
  • Retirees should be careful about putting their retirement funding contributions on hold while setting up their new business. First prize is to ensure that one can continue all monthly investment premiums to ensure that the retirement plan remains on track, while also bearing in mind the significant tax-break on retirement fund contributions. The primary reason for many retirees entering the freelance economy is to generate additional money to supplement their retirement savings as opposed to drawing from their retirement funds and placing their retirements at risk.
  • At retirement, most people have paid off their home loans and vehicles and are debt-free. Incurring new debt later in life is particularly risk and should be avoided, especially if relying on a fledgling business to service the debt. Once again, ventures into the freelance economy should serve to enhance the retiree’s financial position and not detract from it.
  • Lastly, the ever-evolving and fluctuating nature of the gig economy means that one’s financial plan should be reviewed more regularly than before. It is advisable to partner with a financial advisor who has sound financial, tax and business acumen, and who is able to meet regularly to review, revise and re-structure as the business grows and evolves.

For retirees who feel they have been forced into formal retirement when they still have so much energy, talent and accumulated knowledge to share, the gig economy offers a new and exciting range of opportunities for them to remain engaged, active and relevant. If change really is the only constant in life then perhaps Socrates was right when he mused that “the secret of change is to focus all of your energy not on fighting the old, but on building the new.”

Have a fabulous weekend.

Sue



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