Retirement Planning for the self employed – it is never to soon to start!
My business is called $umthing. The “Sum” being an acronym for Students Understanding Money. Check out the website sumthing.ca for a list of different classes I offer re managing your money.
You are potentially a young entrepreneur, maybe with a young family, and the thought of your retirement has yet to become a glimmer in your minds eye. There is also the potential that you are in your 40’s or 50’s and retirement is closer than you want to consider. It could be, that you as an entrepreneur, like many, are running your business on the side along with a full-time job with pension benefits. Regardless of the scenario, you will want to retire at some point. This blog will be dedicated to things you need to do to get prepared.
Let first review Government Benefits
Now the government benefits of Canada Pension Plan (CPP), Old Age Security (OAS) and potentially Guaranteed Income Supplement (GIS) are annuity type income that you will be paid for the rest of your life once you start; but they are no where close to being sufficient to give you what you likely want in the way of retirement income.
Many business owners have succession plans, to hand their business off to their children (usually at a low cost), and some hope to be able to sell their businesses, which in some cases works well and in others, not so easy, many just close their doors without gaining any revenue to support them in retirement.
It is important to note that to receive, and continue to receive these government benefits you MUST file your income taxes annually (on time).
Canada Pension Plan
CPP – you must have paid into this to get it, and the amount will vary based on what you put in and when you take it out. A lot of people – a whopping 95%, decide to take their CPP early at age 60 (which means a substantial reduction in the amount you get and remember this reduced amount is FOREVER!). The standard age is 65, and if you read Pattie Lovett-Reid’s blog waiting until 70 will net you 150% increase. So if you can, hold off until 70. It may be worth using some of your savings, RRSP or TFSA to get you to 70, unlike CPP, once your RRSP, TFSA and savings are gone, they are gone.
Old Age Security
OAS is available to Canadians when they turn 65. Old age Security is a set amount and adjusts with inflation.
Guaranteed Income Supplement
GIS – is a top up for low income. You do not have to apply for GIS, it will be automatically generated based on your taxable income each year. Therefore, if you divest funds from your RRSP, RRIF, Stocks etc. that cause your taxable income for that tax year to bring you above the base amount, you will lose your GIS until your taxable income goes back to the set limit.
Now onto the savings you put away
I am a great believer in planning for your future from an early age. So as soon as you start making an income, regardless from where, I always educate students to put 10% aside, ideally having it pulled out at source, so you do not miss it is the best approach. All banking institutions have a “pay yourself first” plan of some form that will pull a set amount out of your account and move it into a special savings account on a regular basis. The goal is to NOT touch this money but move it into some form of investment that will grow and be there for your retirement.
As a self-employed business owner, be sure to set some amount aside monthly and move it into your retirement fund, whatever type of fund you decide meets your needs, but don’t miss putting this money aside. Even in a slow month, this is the most important things you can do for yourself.
Registered Retirement Savings Plans (RRSP) and Tax-Free Savings (TFSA)
As a small business owner, depending on whether you have set yourself up as a corporation and you take dividends or if you are an employee and paying regular income taxes, you may not find the tax savings of an RRSP to be as beneficial as putting your money into a Tax Free Savings Account (TFSA).
With an RRSP, it allows you to defer tax now and pay tax on the money later when the income tax rate may be lower. The advantage of a TFSA is that it uses after tax money and will not be taxed when you take it out. Tax Free savings accounts have been in play for several years now, with limits ranging from $5-6 thousand a year. If you can manage to put the maximum in each year with some investment, this will give you a nice nest egg to go along with your government income. If you are just opening a TFSA now, you have all of the previous years amount eligible to be put into your TFSA.
Company Pension Plans
Many the entrepreneur only start their business once they retire, when they no longer need to focus on putting food on the table for the family and can now focus on what they are passionate about. More than one millionaire was made after they retired! If you are fortunate enough to have a company pension to go along with your government income, and some savings, your retirement will look rosy, especially if you now have a business that keeps you busy, engaged and enjoying life.
So, start now!
If you have avoided putting those savings aside, START NOW! Do not delay! It may seem difficult at first, but you need to look to the future, do you still want to be working when you are 75 or 80? That is the unfortunate reality for a lot of self-employed people who did not plan. You can start with baby steps if you are younger by putting 10% aside every pay into a TFSA or RRSP (depending on your situation), if you are closer to 40+, then the higher the percentage the better as your timeline is getting much shorter.
Check with a financial planner
Use of a financial planner is a free service when reviewing your options, and there are a couple ladies here on Manitoulin Island, check the business section of this website. Why go off Island when the resources are here to help you achieve your goals.
North Channel Financial, Elyse Labelle