The way we work is evolving faster than the way we plan for retirement. While the varying retirement plan options have evolved in the past few decades, the most significant change is that the responsibility for saving toward retirement has shifted from the government to employers and now to individuals.
20+ years ago it was more of the norm for workers to be covered by a defined benefit plan or pension. Pensions generally pay a fixed sum of money each year, or annuity, based on a worker’s years of service and salary at retirement. This means 20 years ago, your retirement amount was determined based on showing up and getting paid, rather than your personal saving habits.
Now, nearly half of workers can participate in a defined contribution plan like the 401k. These allow the employer, employee or both to make contributions toward a retirement account on a regular basis. But these plans are still designed to be attractive to employers, and even then, not all employers.
The rise of freelancers and small businesses
There has been a growth of small businesses and self-employed or contract workers in the US. According to the 2016 Freelancing in America Report from the Freelancers Union and Upwork, 55 million Americans are freelancing – that’s up 2 Million from last year, totaling 35% of the U.S. workforce.
Half of freelancers also claim “there is no amount of money that would get them to take a traditional job and stop freelancing,” meaning the independent workforce is here to stay. From the same 2016 report, of the 60% of Freelancers that put money into savings last year, only 41% are using the savings for retirement.
Not only are retirement plans less available to these workers, but today’s workers also change jobs more frequently, meaning they must take retirement into their own hands. Luckily, there are plenty of retirement planning options for these workers.
Individual Retirement Accounts (IRAs) are yours, and stay with you no matter where you work. Each is a type of account that lets your savings and investments grow with certain tax advantages, so you can stack more toward your retirement.
ROTH: Pay taxes on the money you put in, but not when you take it out.
You can set aside after-tax income up to a specific amount each year so your money may benefit from decades of tax-free, compounded growth until you’re ready to withdraw it.
TRADITIONAL: Save on taxes on the money you put in, and pay taxes when you withdraw it.
You can contribute up to a specific amount each year and some of those contributions may be tax-deductible depending on your income and tax-filing status. When you’re ready to retire, this money will be treated as current income.
SEP: A type of IRA that offers a potentially higher maximum contribution depending on your 1099 income.
If you’re self-employed you may be able to contribute up to 25% of your self-employed income (not exceeding $54,000), and receive tax deductions depending on your income and filing status. Like a traditional IRA, this money will be treated as current income when you retire.
No matter the IRA you choose, it’s important to start sooner rather than later. Honest Dollar offers simple access to IRAs specifically designed for today’s worker. And you can get started in minutes - with no account minimums.
It’s time to take your retirement into your own hands - where it should be.
Paragraph 4: US Small Business Administration, https://www.sba.gov/managing-business/running-business/energy-efficiency/sustainable-business-practices/small-business-trends
Paragraph 4: 2016 Freelancing in America Report, http://www.slideshare.net/upwork/freelancing-in-america-2016/1
Paragraph 6 & 7: https://www.irs.gov/retirement-plans/traditional-and-roth-iras
Paragraph 8: Contribute as much as 25% of your net earnings from self-employment (not including contributions for yourself) up to $53,000 (for 2015 and 2016) and $54,000 (for 2017) https://www.irs.gov/retirement-plans/retirement-plans-for-self-employed-people
Goldman Sachs & Co. LLC (“GS&Co.”) does not provide accounting, tax or legal advice. Nothing communicated to you on this website should be considered tax advice. You should consult an independent tax professional regarding your personal circumstances. This material is provided solely on the basis that it is educational only and will not constitute investment advice. GS&Co. is not a fiduciary with respect to any person or plan by reason of providing the material or content herein.