The article argues that the rise of Information Technology and Artificial Intelligence is ushering in a new era of gig work, mirroring pre-Industrial Revolution self-employment and signaling the decline of lifelong, stable jobs with salaries and benefits. This shift presents significant challenges for financial planning, particularly for retirement, as self-employed individuals lack the regular income streams and automatic enrollment in pension plans that employees benefit from. The author suggests that financial advisors must adapt by recommending strategies like token SIPs, lump-sum investments during periods of excess income, and building a corpus for custom pension-like products, while emphasizing diversification to mitigate business concentration risk and advising a phased investment approach based on income growth.

The article argues that the rise of Information Technology and Artificial Intelligence is ushering in a new era of gig work, mirroring pre-Industrial Revolution self-employment and signaling the decline of lifelong, stable jobs with salaries and benefits. This shift presents significant challenges for financial planning, particularly for retirement, as self-employed individuals lack the regular income streams and automatic enrollment in pension plans that employees benefit from. The author suggests that financial advisors must adapt by recommending strategies like token SIPs, lump-sum investments during periods of excess income, and building a corpus for custom pension-like products, while emphasizing diversification to mitigate business concentration risk and advising a phased investment approach based on income growth.

The article argues that the rise of Information Technology and Artificial Intelligence is ushering in a new era of gig work, mirroring pre-Industrial Revolution self-employment and signaling the decline of lifelong, stable jobs with salaries and benefits. This shift presents significant challenges for financial planning, particularly for retirement, as self-employed individuals lack the regular income streams and automatic enrollment in pension plans that employees benefit from. The author suggests that financial advisors must adapt by recommending strategies like token SIPs, lump-sum investments during periods of excess income, and building a corpus for custom pension-like products, while emphasizing diversification to mitigate business concentration risk and advising a phased investment approach based on income growth.

With the rise of information technology and the fall of the Industrial Age, one thing is sure—people may not have a stable, steady job until age 60. We are witnessing a return to a new style of income pattern: gig work.

Gig work could be as a consultant, professional, or freelancer. The people who require your services would engage you for the job and then pay you for your time and effort. Once the job is complete, the contract ends, and you go back to find newer clients. No more long-term commitments, no more salaries, and no more bonded labour.

If you look back, before the Industrial Revolution, most of society was self-employed. None of us had full-time jobs, or steady paychecks or benefits like insurance, pensions, or gratuity. Slowly, but steadily, we are moving back to this culture, thanks to the rise of Artificial Intelligence in the Information Technology Revolution.

The corporates may not need full-time equivalents now. They need specialists and subject-matter experts for a short period. The bottom line is, the period of life-long jobs and salaries is coming to an end. If you are good at what you do, you would still earn income, but as a self-employed professional, small business owner, or freelancer.

This poses a new challenge to the financial advisors—planning for their retirements.

I have compiled a few frequently asked questions and answers about how financial advisors should handle this situation.

1. Is retirement planning different for the self-employed than for employees?

Yes. Employees get a regular income in the form of a salary. They get medical insurance, leave, and annual increments. SIPs can be easily set for them, and we could even perform a step-up SIP based on their salary hike.

For the self-employed, a regular income is not available — hence SIP is not possible. The only option is to set up a token SIP of ₹100 or ₹500 a month and do a lump sum if they have excess income.

2. What about pension plans for the self-employed?

Employees are auto-enrolled in PF and NPS, but the self-employed are not. So we need to create a custom product, like an SWP (Systematic Withdrawal Plan), that would work like a pension. For this to happen, we need to build a corpus first.

3. What is the difference in income pattern for employees and the self-employed?

Employees have a steady, linear paycheck, whereas self-employed individuals have a low initial income followed by nonlinear, step-like income increases.

For instance, an employee might be getting a salary of ₹1 lakh/month now and a 15 per cent per-year hike. Their second-year income would be ₹1.15 lakh/month, third-year ₹1.32 lakh/month... and tenth-year income ₹3.51 lakh/month.

Whereas a self-employed person might earn only ₹10,000 a month in the initial 5 years and might end up with a monthly income of ₹20 lakh after 10 years.

This makes retirement planning very complicated. Income visibility is much easier for employees than for the self-employed.

The solution is to invest a percentage of disposable income and gradually increase it once it crosses the marginal propensity to consume.

4. Wouldn't it be better to reinvest in their own business?

Self-Employed prefer to invest in their own business and plough back their capital.

But the problem is the concentration risk. After 10 years, if their business is wiped out, they will have no means of generating income.

5. What is the recommendation?

If your current business is growing at a CAGR of 25 per cent or more each year, reinvest all your gains in it, as it will become very successful.

If not, take money out and buy stocks or equity mutual funds in sectors complementary to your business model, and diversify.

For example, if you are running a construction company, then invest in consumer durables, REITs, consumables, healthcare, automobiles, cement, and metals. You could also invest in other growing sectors such as media, IT, and banking.

6. What is the retirement plan?

a. Invest just 10 per cent of your income in the initial 3 to 5 years. The rest of the disposable income should go into a savings fund. If the employees have a 3- to 6-month emergency fund, the self-employed should have a 9- to 12-month emergency fund.

b. Once your income takes off, in the 5th to 10th year, you may be able to invest 20 to 30 per cent of your income, as your expenses won't rise as fast as your income.

c. In the 10th to the 15th year, your focus should be to concentrate on businesses that are growing faster than your core business. Buy more of them and trim the losers.

d. In the 15th to 20th year, your income would be extremely higher, and your investing percentage could be as high as 50 per cent, as your lifestyle expenses would never catch up, unless you are a spendthrift.

e. Once your corpus is built by the 20th year, you can safely retire. An SWP based on the portfolio value would be more than enough to give you a steady income.

Self-employed need not push it that hard

During low-income periods, don't let the stress lead you to overinvest. Wait for the good times, and then contribute more.

During low-income periods, your expenses would naturally be lower. Learn to stick with the same during high-income periods so that you can raise your investing levels.

Let your core business not blind you from other income opportunities. The best financial lesson for the self-employed is to tap as many income opportunities as possible. Mergers, acquisitions, buyouts, or diversification into new opportunities should be pursued.

Since you would be more passionate than a regular employee, the chances of winning would be higher, and you might be ready to take on additional work. Use that to your advantage and spend more time on businesses that will grow quickly.

Don't worry about the retirement corpus value in the initial 5 years. If you compare yourself with a regular employee, their retirement corpus may be 10x higher than yours in the first 5 years. This is because they have a higher initial income.

As time goes on and your income starts growing exponentially, you would outdo your employee counterpart in both disposable income and retirement portfolio.

The writer is a SEBI Registered Investment Adviser (INA000021757), SEBI Registered Research Analyst (INH000025045), and author of ‘How to join the top 1% options traders club’.

DISCLAIMER: Investments in the securities market are subject to market risks, including the potential loss of principal. Past performance does not guarantee future results. Information provided is for educational purposes only and should not be considered financial advice. Investors should read all related documents carefully and consult a certified advisor before investing. Registration granted by SEBI and Enlistment with RAASB/BSE and certification from NISM in no way guarantee the performance of the intermediary or provide any assurance of returns to investors. The investor is requested to take into consideration all the risk factors before actually trading in stocks or derivatives.

The opinions expressed in this article are those of the author and do not purport to reflect the opinions or views of THE WEEK.

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