Easy, Smart Ways for Gig Workers to Invest for Retirement

It’s true: With just one investment you can have a “set it and forget it” retirement portfolio that lets you get back to growing your business.

Written by Carla Fried / February 1, 2022

Quick Bites

  • Don’t worry. Investing for your retirement doesn’t need to be complicated.
  • Target Date Funds (TDFs) that invest in index funds do all the heavy lifting for you.
  • Or build your own diversified retirement portfolio with just three funds or ETFs.
  • A robo-advisor operates a lot like a TDF, but often with more investments.

Making the smart decision as a gig worker to save for retirement is a huge win. But it triggers one more big decision: how to invest the money you’re setting aside in an IRA or SEP-IRA.

And that’s where decision paralysis can set in. You may not know a stock from a bond. A mutual fund from an ETF. And you have no clue about asset allocation.

Nor the time to take a deep learning dive, even if you wanted to.

“When your day is full of decisions about running your business, it’s no surprise that people don’t have brain bandwidth to make decisions about finances,” says Tara Unverzagt, a certified financial planner at South Bay Financial Planners in Torrance, California. “People can get stuck and do nothing if they make it too complicated.”

That’s not going to be you. We’ve got the uncomplicated guide to investing for retirement, starting with a few key points to keep in mind, then on to smart ways to invest your money.

Inside this article

  1. Retirement investing principles
  2. Get mutual funds or ETFs
  3. Consider index funds or ETFs
  4. Focus on the long term
  5. Smart ways to invest
  6. Choose a target-date fund
  7. Build with three funds
  8. Hire a robo-advisor

3 Principles of Smart Retirement Investing

Before we dive into investing strategies, getting a good grip on just a few key investing principles is going to deliver a big jolt of confidence that will make it easier to choose how to invest.

Stick with mutual funds or ETFs

When you make an investment in a single mutual fund or exchange traded funds (ETFs), you become an instant owner of hundreds, often thousands, of stocks or bonds. That’s a good thing, as diversification means you aren’t betting on one or just a handful of investments.

The big difference between funds and ETFs is sort of irrelevant when you are investing for a long-term goal (what’s longer than retirement?). But here’s the deal:

The price of an ETF changes throughout the trading day. The share price for a mutual fund is set once a day—after the market closes. If you’re a frenetic day trader, ETFs are a much better option than mutual funds. If you place a trade for a mutual fund at, say, 11 a.m. ET, you won’t know the share price for your buy/sell until after the market closes (4 p.m., Monday to Friday) and it will be based on the closing prices for all the underlying investments in the fund.

But you’re not a day trader, right? So either a fund or ETF can work just fine for you. As long as they deliver on the next must-have: low costs.

Consider index mutual funds or ETFs

One of the hard truths of investing is that past performance is not a guarantee of future performance. But there is one investing feature that has predictive power: fees. A study by investment research firm Morningstar found that funds with the lowest annual cost (details in a second) were three times as likely to outperform funds with the highest annual costs.[1]

Which brings us to the next suggestion: Embrace being passive, if only as an investor.

Passive investing involves owning a mutual fund or ETF that tracks a given index, such as the S&P 500 stock index. At the other pole is active investing. An actively managed fund (and sometimes an ETF) is run by a manager—or team of managers—who is in charge of making calls on what to buy and sell.

Morningstar keeps track of how passive funds/ETFs perform relative to actively managed portfolios. Active managers have a pretty lousy record when it comes to consistently outperforming passive index funds/ETFs.[1]

That’s not a knock on the investing skill of managers. Often the problem is the higher cost of operating an actively managed fund.

All funds and ETFs charge an annual fee called the expense ratio (ER). The ER is deducted from the gross return of a fund or ETF before your account is credited with the net (after expenses) return. The average asset-weighted expense ratio for all active stock mutual funds was 0.62% in 2020 compared to 0.12% for passive funds and ETFs.[1]

That 0.50% can make a huge difference. Let’s assume Active Fund and Passive Fund both have a gross annualized return of 6%, and their expense ratio is the average (0.62% and 0.12%). And let’s assume you invest $500 a month, every month, for 30 years. The difference in expenses works out to the Active Fund growing to around $445,000 and the Passive Fund growing to around $490,000. That’s a $45,000 difference!

Focus on the long term

The longer you expect to leave your money untouched, the more you want to consider owning stocks. Yep, there will be times when stock values fall. A lot. Bear markets are part of the deal. But over time—and you’ve got decades of time if you’re in your 20s, 30s or 40s—stocks tend to earn more than bonds. No disrespect to bonds; they are boring for a very good reason: When stocks are falling, bonds tend to hold steady, and often go up in value.

Since 1950, U.S.stocks have had an average annualized return of 11.5% and bonds 5.8%.[2]

To get a sense of the right mix of stocks and bonds for your retirement investing, you can fiddle around with free online asset allocation tools that ask a few questions and then spit out a suggested mix. You don’t need to be a client to use Vanguard’s allocation tool.

Cringing at the thought of having to figure this out? No worries. There are simple ways to get invested and have a solid mix of stocks and bonds using low-cost index mutual funds or ETFs.

3 Easy, Smart Ways to Invest for Retirement

Choose a target-date fund (TDF)

If you had a workplace 401(k) or 403(b) in a past life, you might be up to speed on TDFs, which are very popular among younger adults with a workplace retirement plan.[3]

Discount brokerages including Fidelity, Schwab and Vanguard have low-cost index TDFs you can invest your IRA in.

All you need to do is pick an index TDF with a year attached to its name that seems like a good estimate of when you expect to retire and the TDF handles all the investment choices. For example, if you’re 30, maybe you pick a 2060 TDF. The TDF you choose will invest your money in five or so different stock and bond funds. The further out you are from your target retirement date, the more your TDF will own stocks, rather than bonds.

A TDF can be a truly hands-off choice for the time- and interest-constrained. The folks pulling the levers at the TDF are in charge of automatically rebalancing the fund. That’s the wonky term for making sure the fund sticks to its stated mix of stocks and bonds. For example, if the TDF’s goal is to keep 80% invested in stocks and that strays to 90% during a big market rally, the TDF will sell some of its stock fund holdings and reinvest more in bonds to get back to its intended 80/20 mix.

A warning: There are plenty of TDF haters out there.[4] The main complaint is that the mix of stocks and bonds isn’t personalized; it’s just based on how many years you have until retirement, and each firm’s algorithms can spit out different allocation mixes of stocks and bonds.

All true. But Unverzagt says the naysayers miss the bigger ease-of-use win that TDFs deliver. “Having a little more or less in any one asset class is not going to move the needle as much as getting your money invested in anything at all,” she says.

Justin Pritchard, CFP, owner of Approach Financial in Montrose, Colorado, also green-lights the TDF solution for busy gig workers. “I’d rather see somebody use a target-date fund than get overwhelmed at the universe of investment options,” he says. “Don’t let the perfect be the enemy of the good.”

Build your own three-fund portfolio

If you want more control of your stock/bond mix, Allan Roth, owner of Wealth Logic investment advisory in Colorado Springs, Colorado (@dull_investing), suggests you own three index mutual funds (or ETFs): a U.S. total market stock index fund, an international stock index fund and a U.S. bond index fund. Whatever you decide to invest in stocks, Roth suggests putting two-thirds in the U.S. fund and the other third in an international stock index fund. His thinking is that given you live in the U.S. and are thus dependent on the price of U.S. goods and services priced in dollars, it makes sense to own more U.S. than international.

Tip: Discount brokerages including Fidelity, Schwab, TD Ameritrade and Vanguard all have low-cost index mutual funds and ETFs.

Pritchard is also a fan of a simple three-fund approach to get going, but he cautions that you need to be up for “ongoing maintenance” if you use this approach rather than a TDF. It’s on you to check your asset allocation and rebalance when you own too much or too little of stocks or bonds. That said, this is easy to do online, and because your money is inside an IRA or SEP-IRA there is no tax bill when you “exchange” shares of one holding for another.

Hire a robo-advisor

A robo-advisor works a lot like a target-date fund. You are plunked into an off-the-shelf mix of funds that the firm’s algorithm deems appropriate given your answers to a bunch of questions you answer that dig at your goals and appetite for risk. And as with a TDF, your portfolio is automatically rebalanced.

Erik Baskin, of Baskin Financial Planning in Cheyenne, Wyoming, says a robo-advisor such as Wealthfront or Betterment will typically build “a more complex and diversified” portfolio than the standard three-fund approach, by adding in funds for market niches such as real estate, emerging stocks and commodities. The value of that approach is that over the long term these niche asset classes might reduce a portfolio’s volatility.

That comes with an added cost. While robo-advisors use low-cost ETFs (yay!), they typically add an annual fee of 0.25% for their allocation and rebalancing service.

Unverzagt is more in camp TDF for gig workers. “They work similarly to a robo-advisor but are cheaper and easier,” she says. “Target-date funds are really a great value for the person who wants to ‘invest and forget it.’”

Which would give you more time to focus on growing your business.

Article Sources
  1. “How Fund Fees Are the Best Predictor of Returns,” Morningstar, https://sg.morningstar.com/sg/news/154499/how-fund-fees-are-the-best-predictor-of-returns.aspx.
  2. “Guide to Markets: Q1 20220,” Slide 63, J.P. Morgan, https://am.jpmorgan.com/content/dam/jpm-am-aem/global/en/insights/market-insights/guide-to-the-markets/mi-guide-to-the-markets-us.pdf.
  3. “How America Saves,” Vanguard, https://institutional.vanguard.com/content/dam/inst/vanguard-has/insights-pdfs/21_CIR_HAS21_HAS_FSreport.pdf, page 59, figure 57.
  4. “Why Target Funds Might Be Inappropriate for Most Investors,” The Wall Street Journal, https://www.wsj.com/articles/why-target-date-funds-might-be-inappropriate-for-most-investors-11641500579.

About the Author

Carla Fried

Carla Fried

Carla is an expert on retirement planning and behavioral finance with over 20 years’ experience in personal finance journalism. Her work has been published in Bloomberg, CNBC, Consumer Reports, Money, The New York Times, and other journalism brands.

Full bio

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