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September 25, 2019 Adrian Zee

How to save for retirement when you’re self-employed

Deciding what you want your retirement to look like now will help you achieve that lifestyle later.

As a self-employed Canadian, retirement may not always be top of mind, but it should be. In a 2018 survey, 42 percent of Canadian small business owners were unsure about their retirement plans. This uncertainty may or may not contribute to the fact that the average retirement age of self-employed Canadians was 67.7, several years later than the average Canadian, who retired at 63.8 in 2018.

In this article, we reflect on what self-employed Canadians need to keep in mind in preparing for retirement. This includes thinking about what you plan to do once you retire and what tools out there can help you save the money required for the next stage of your life.

What does retirement look like to you?

Everyone’s retirement will look different and cost a different amount. While you can’t foresee what age you’ll live until, you can foresee what activities you’ll do in retirement. If you want to travel the world, you’ll need to save a lot more than if you plan to retire and volunteer full-time. 

Of all the questions, the most important is at what age do you want to retire at? Retiring at 65 as opposed to 60 means you’ll have five additional years of income going into your nest egg, which could equal hundreds of thousands of dollars depending on your income level and the power of compounding interest. But if retirement simply means transitioning to part-time work, retiring early is a lot more achievable. 

Also consider your financial dependents. If your children are still in school, will they need any financial support soon? How about an ageing parent who may need a long-term care home in the not-so-distant future? These can all impact your ability to retire. 

Pensions: retiring with money in your pocket

Most Canadians retire with income coming in from three sources: Old Age Security (OAS), the Canadian Pension Plan (CPP), and any personal savings and employment pensions. While OAS is more or less the same for the employed and the self-employed, CPP and personal savings and employment pensions have some substantial differences. 

OAS is a pension plan funded by Canadian tax dollars, meaning you don’t pay directly into it. It provides a monthly payment to seniors over 65 who meet certain Canadian citizenship and residency requirements. CPP, on the other hand, provides individuals who’ve contributed to the pension program with income in case of retirement, disability, or the death of a spouse.  Retirement benefits from CPP can start as early as age 60 or as late as 70 if you’re in the retirement bucket. Retiring earlier or later than 65 can result in permanent decreases or increases in what you receive from your CCP retirement payouts. 

Although the benefits of CPP are pretty much the same whether you were self-employed or not, paying into the CPP is different. A person employed by a business regularly contributes 5.1% of their paycheque to CPP through an automatic deduction. Then, the individual’s employer contributes another 5.1% to their CPP. 

Unfortunately, when you work for yourself, there won’t be an employer contributing to your CPP, and you’ll be contributing the whole 10.2% yourself. You’ll also need to arrange your contributions since there isn’t a paycheque to siphon off of every other week. As a self-employed person, you contribute this 10.2% based on your net business income. So other incomes, such as capital gains, won’t be included. 

The last branch of your retirement income is from employer pensions and personal savings. Obviously, because you’re self-employed the employer pension portion is irrelevant to you, but a Registered Retirement Savings Plan (RRSP) is available to anyone. An RRSP can be set up at any financial institution such as a bank or credit union and allows contributors to save for retirement and additionally deduct any saving contributions from their taxes — you’ll still need to pay tax when you withdraw from it later on, however.

If all these acronyms and saving tools sound confusing to you, then it may be better to seek help from a financial advisor. Unless you have a legal or accounting background, you likely leave that type of work for a lawyer or accountant. Similarly, a financial advisor is a specialist with a career in helping people save money. 

Planning for retirement is an important step for everyone, especially if you’re self-employed. Consider what lifestyle you want in retirement, when you want to retire, and if you’ll have anyone financially dependent on you during your golden years. OAS, CPP, RRSP, and other tools will help you make your life after your 65th birthday your best ones yet.

Adrian Zee

Adrian Zee is a freelance writer and a student at Osgoode Hall Law School. Previously, he studied management and writing at Western University and worked in the data & analytics industry. Adrian is also a part-time food writer and photographer at DailyHive/DishedTO.