Moonlighting. What an interesting phrase; it sounds almost romantic, maybe even luxurious. But for more than 7 million Americans1, working a second job has become a new economic reality.
With January’s fiscal cliff deal, a resuscitated payroll tax hike has meant even less income in workers’ purses and wallets. Despite general market resurgence and improving jobs numbers2—a 5-year low, the fewest since before the “Great Recession”—the Employee Benefit Research Institute (EBRI) recently reported that, “the percentage of workers confident about having enough money for a comfortable retirement is essentially unchanged from the record lows observed in 2011.”3
Of course, as many have reported, a dip in unemployment benefit applicants does not necessarily represent a healthier economy. In many cases, people have altogether stopped looking for work or have transitioned from full-time employees into part-time and seasonal work, in what the New York Times earlier this year called “one of the more unsettling trends in this recovery.”4
So less people are working, and those who are may be working fewer hours. It makes sense, then, that a major part of the expressed uncertainty in the EBRI study lies in the challenge of saving enough for a financially secure retirement. In fact, cost of living and day-to-day expenses are the most cited factor for shortcomings in contributions to retirement plans.5
As if the situation wasn’t bad enough, consider some compounding factors in the American workplace:
- “Americans work more than anyone in the industrialized world.” We work longer days, enjoy fewer vacations and retire later in life.6
- Millennials (under 30) face staggering unemployment more than 5% higher than national rate7 ; still find themselves with $26,600 average student loan debt.8
- Increased life expectancies, increased global population and the automation/increased efficiencies for manual, unskilled labor have heightened intense competition for limited open positions
An Allocation Approach to Income
As financial advisors, we often remind investors of the role that different asset allocations play in the variability of portfolios, in some cases accounting for up to 93.6% of the variation in quarterly returns.9 The more diversified the range of assets and their correlation, the less risk any individual investor will bear on any particular asset or class of asset.
Let’s address the market inefficiencies of US labor in the same vein. The risk for any individual worker—to the detriment of their future earnings, retirement, etc.—is high. Similar to capital markets investors, the everyday worker faces both historical and implied volatility:
- To the risk of disability
- To the risk of being laid off, fired, or having to take extended periods of unpaid time off
- To government labor regulation (e.g. hours or wage shifts, furloughs)
- To currency markets and government regulations of them (value of dollar, inflation levels)
Depending on just one job, one employer, one paycheck, or one career is the equivalent of little to no diversification in a portfolio. In a sense, you are putting all of your proverbial eggs into one perpetually chipped-at basket.
So, we pose the question: Doesn’t it make sense to diversify your income stream? Whether that entails a part-time job, an entrepreneurial vocation, or a pet or passion project, you may be able to reduce the risk that being in one job poses to your future returns. All you typically need is a little compound interest, and to be interested.