Annuities in Gig Economy Retirement Planning

Gig workers thrive on flexibility and autonomy but face significant retirement challenges, including the lack of access to employer-sponsored retirement programs. Annuities are a viable solution to overcome this void. Read on to learn how annuities make sense for gig workers planning for retirement.

The gig economy, which is characterized by short-term contract work and freelancing, has become a significant part of the modern U.S. labor market. According to a comprehensive report prepared by TeamStage, 36% of workers in the U.S. are in the gig economy. This equates to 57.3 million people, 15.8 million of whom identify as full-time gig workers.

The appeal of the gig economy has increased substantially since the COVID-19 pandemic – as an increasingly large number of workers have prioritized flexibility over stability, shunning traditional employment in the process. Unfortunately, achieving greater independence via gig work comes with significant financial challenges, including potentially erratic cash flows and the lack of access to employer-sponsored healthcare insurance programs and retirement platforms, such as 401(k) plans and defined benefit pension plans.

The lack of access to employer-sponsored retirement platforms is the focus of this article. Without these platforms, gig workers are left to navigate the complexities of planning and saving for retirement on their own. Some have the financial knowledge and discipline necessary to facilitate a successful retirement, but most need a lot of help to achieve financial security.

The average gig worker needs an all-in-one means to (1) save flexibly, (2) invest and grow the savings on a tax-deferred basis and (3) generate an adequate, reliable stream of income during retirement. As discussed below, annuities can fill this void, but their suitability needs to be evaluated on a case-by-case basis.

What Are Annuities?

An annuity is a financial product offered by insurance companies that can provide a steady stream of income, (typically, in retirement) in exchange for an upfront cash investment or a series of cash investments. At the highest level, there are the following two types of annuities:

1. Immediate annuity: With this structure, you begin receiving income distributions within a year of purchase.
2. Deferred annuity: With this structure, you begin receiving income distributions after a specified accumulation period that typically spans between six and 10 years.

Within the deferred annuity category, there are three distinct types of products – fixed, index and variable annuities, all of which offer investors the benefit of tax-deferred growth.

1. Fixed annuities are the safest type of annuity because they offer a guaranteed, fixed rate of interest.
2. Index annuities, which are often referred to as fixed index annuities, are riskier than fixed annuities, because their returns fluctuate in tandem with an index, such as the S&P 500. However, they typically provide downside protection.
3. Variable annuities are the riskiest type of annuity, because they entail direct investment positions in volatile debt and equity assets that can lose value.

Annuities can serve as a great, hands-off way for people to generate income in retirement. However, they are not right for everyone. As discussed below, annuities have both advantages and disadvantages.

Advantages and Disadvantages of Annuities

Annuities replicate the perks of employer-sponsored retirement plans, but they do so in a measured way – enabling you to grow your investment, while protecting yourself on the downside. They also enable you to maintain your investment in a completely passive manner. Annuities offer the following advantages and disadvantages:

Advantages

• Customization: Annuities offer a variety of options relating to the frequency of contributions, the utilization of add-on riders and the duration of income distributions. This flexibility allows annuitants to tailor their contracts to meet their financial goals in accordance with their tolerance for risk.
• Tax-deferred growth: Annuities allow individuals to invest without paying taxes on investment growth until income distributions commence.
• Income stability: Annuities can convert savings and investment growth into a reliable stream of income in retirement – oftentimes, for life. This mitigates longevity risk, which is the possibility of outliving one’s savings.

Disadvantages

• Complexity: Annuities, with their many variations, can be difficult to understand. The annuity industry is striving to demystify these products, but more work needs to be done on this front to properly educate consumers.
• Illiquidity: Once money is placed into a deferred annuity, it is typically locked up for a specified amount of time. Early withdrawal results in significant penalties and taxation that can erode wealth.
• Potentially High Costs: Annuities, particularly index and variable products, can come with exorbitant fees that cut into investment returns and reduce payouts. When evaluating an annuity, be sure to consider the embedded commissions, mortality expenses, investment management and administrative fees as well as any surrender charges and add-on fees for riders of interest.

Why Annuities Make Sense for Gig Workers

Prior to investing in annuities, be sure to carefully weigh the pros and cons. Generally, these products make sense for hands-off investors that want the ability to grow their money without being exposed to the risk of capital loss. Annuities can be especially beneficial for gig workers that do not have access to employer-sponsored retirement platforms.

For gig workers, annuities serve as pension plan equivalents, offering the means to make flexible contributions, grow the contributions in a tax-advantaged manner and generate consistent income in retirement. In an employment landscape marked by irregularity and unpredictability, these benefits provide gig workers much needed peace of mind.

The Future of Annuities in Gig Economy Retirement Planning

As the gig economy continues to grow, financial institutions are paying more attention to the unique needs of this workforce. Some annuity providers are even developing products specifically designed for gig workers, many of whom experience fluctuating income streams and limited savings capacities. Micro-annuities are a prime example. These products allow savers to make unusually small and frequent contributions.

Additionally, technological advances are driving the development of digital platforms that make it easier for gig workers to compare annuity products, assess fees and forecast and track contributions. These advances should make annuities more appealing and easier to manage for the decidedly tech-savvy gig workforce.

Annuities are not the ideal investment for everyone, but they offer a promising solution for conservative, hands-off investors that seek financial stability in retirement. They are especially appealing to gig workers who need access to employer-sponsored retirement platforms.

Annuities help these individuals close the gap and achieve parity with traditional workers that enjoy the benefits of 401(k) plans and defined benefit pension plans. With annuities, the average gig worker can save in a flexible manner, invest and grow the savings on a tax-deferred basis and produce a reliable stream of income in retirement. 

According to TeamStage, the gig economy is expanding three times faster than the total U.S. workforce. As this trend evolves and annuity providers focus more energy on the needs of gig workers, expect the demand for annuities to grow.

Editor Norah Layne contributed to this article.