Saving for retirement: Can the self-employed create their own pensions?

TORONTO — Jennifer Yan loves being a circus coach and fitness instructor, but the 30-year-old B.C. native knows she won’t be able to do it forever. Yan says the circus school she’s planning to open in Mission, B.C., could eventually help her retire from teaching. But with no pension plan and only a meagre nest egg in her tax-free savings account, her retirement plans are uncertain. “Day-to-day I kind of manage,” says Yan. “But when I sit back and try to plan for my future, I do get a little antsy and think, ‘Oh God, what am I going to be doing when I’m 75?”’ 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 labour have made saving for retirement more challenging — and more important — than ever.

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“Thirty years ago, someone else took care of it for you,” says Kurt Rosentreter, a senior financial advisor at Manulife Securities. “You just had to basically reach an age and then they start paying you a pension cheque and you don’t have to show up at work anymore. Now that’s gone and you’re on your own and you need to put away a lot of money.” Some young professionals may find themselves torn between whether to set aside money for a home, to start a family or into an RRSP. “It’s just become a lot harder to do the big three,” Rosentreter says. Coupled with the fact that many young people are now carrying high levels of student debt, Rosentreter says some individuals may need to make difficult decisions, such as rethinking home ownership. Experts say that in order to compensate for the lack of defined benefit pension plans, the onus is on young workers to replicate the pensions of the past with their own savings. Tony Maiorino, head of RBC Wealth Management Services, says the first step for people is figuring out how much they can afford to put away. “We’re a very different society than we were in the past,” says Maiorino. “We’re a lot more consumer driven than we are a savings generation. So you need to be thinking about how much are you actually prepared to put into savings? And then the money that is going to go into savings, is that money you want to have locked away for retirement, or do you want to have it available should there be something that you need in the immediate future?”

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Self-employed individuals who run an incorporated business should consider an individual pension plan or a personal pension plan, says Mark Halpern, a certified financial planner and the founder of Wealthinsurance.com. Contributions to an IPP, which imitates the Canada Pension Plan, are tax-deductible for the corporation, says Halpern. “Most Canadians don’t know about this,” says Halpern. “I think it’s one of the biggest hidden secrets.” Defined benefit plans — where the benefits that the employee receives after retirement are outlined up front and the employer is responsible for making up any shortfalls _ have become rare in the private sector. Many employers offer defined contribution plans instead. Those plans set out the employee’s contributions, and in many cases the employer will match them, up to a certain amount. Halpern says it’s important to take advantage of the employer’s offer to match. “It’s like free money that’s being offered to them. They should be maximizing it, and likely there will still be a residual amount that they can put into their RRSPs. So don’t look at it as one versus the other.”