If you’ve ever had a job you’ve grown tired of, then you’ve probably daydreamed of being self-employed. As a freelance writer myself, I can tell you that it’s wonderful to be able to pick your assignments and grow your business but without the fallback of a company pension managed by professionals, saving for retirement falls completely on you.
In fact, nearly 2.8 million people are self-employed, according to the latest report from Statistics Canada. With CPP paying a maximum of $13,370 in 2017, you need to have a solid financial plan in place to make up the difference. With the decline of defined benefit pension plans outside of the public sector, coupled with the rise of self employment, contract work and precarious, part-time jobs, saving for retirement is more challenging and important than ever. “What I see with my self-employed clients is that often they are so busy setting up their business that they forget to put money aside for their pension,” says Ottawa-based certified financial planner Ayana Forward.
What works? “Emulating someone who has a pension,” says Forward. “The key is to look at how much money you’re making annually, and then decide what your main savings vehicle will be. To get started, Forward recommends simply following a general rule of thumb—if you make less than $40,000 annually, chose a tax-free savings account as your savings vehicle. If you make more, chose an RRSP. “Then make your contributions automatic,” says Forward. “That’s basically what employees who have company pensions do—the money comes right off their paycheques, so it’s out of sight, out of mind. Forced saving works.
If you’re making more than $150,000 annually it makes sense to incorporate and save through your corporation where taxation is much lower—about 15% versus a more common 40% among salaried employees. “Self-employed women can run an incorporated business and should consider an individual pension plan or a personal pension plan,” says Forward. Contributions to an Individual Pension Plan (IPP), an employer provided program that replaces RRSP savings by an employee, are another option. To be eligible for an IPP, you need to receive pension-eligible T4 employment income. Self-employment income, partnerships income and dividend income are not pension-eligible. This means if you own your own business, you’d have to pay yourself a regular salary that generates T4 employment income. “One advantage is that all eligible employer contributions are tax-deductible for corporation tax purposes, but won’t be taxable to the employee until the plan starts to generate pension income,” says Forward. This arrangement can work well if you own your own business and are 40 years of age or older.
But just as important as how much you invest is what you invest the money in. Certified financial planner Heather Franklin recommends a good mix of blue chip stocks that will provide both growth and income. “If you look at all the big pension plans, that’s what they hold,” says Franklin. “Whether it’s TFSAs, RRSPs, IPPs or unregistered accounts, consider adding stocks from the financial, pipeline and utility sectors first. Then go further afield to the U.S. and international markets.”
For novices, Franklin recommends a one- or two-day investing conference or workshop to get you started. “You should understand your finances and how different products work,” says Franklin. “It’s not hard. You just have to devote some time and effort to learn.”
Finally, a few years from retirement, have your financial planner run the numbers so you can see how much average annual income you’ll need to support the retirement lifestyle you want and whether your nest egg is on track to accommodate it. You’ll also be able to explore the cost of annuities, (an insurance contract where you pay a lump sum, such as $250,000 or more, in return for a series of monthly payments for life), and whether they’re a good option for you, based on the size of your nest egg, interest rates, and your estimated longevity.
If your savings are running a little short by pre-determined retirement date, consider working part-time for a few years before full-retirement. “This lets you stretch your nest egg and helps you ease into the retirement frame of mind,” says Franklin. “For most people, it’s the best way to glide into the full retirement years—allowing you to test the waters with some extra travel, volunteer work or other activities that will fill the empty hours when you no longer have your business.”