Self-employed with no pension
Here’s how freelance workers and entrepreneurs in Canada can use the unique aspects of “working for yourself” to build a bigger nest egg.
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Here’s how freelance workers and entrepreneurs in Canada can use the unique aspects of “working for yourself” to build a bigger nest egg.
The year 1975 was the high water mark for bell bottoms, soul music and workplace pensions. Back then, around half of Canadian workers had some sort of pension plan through their employers to save for retirement. These days, just under 40%. For the roughly 2.6 million Canadians who work for themselves, that number is effectively zero.
It doesn’t matter whether you own a restaurant, hustle as a freelance designer or work as a day labourer on a landscaping crew—you cannot depend on a pension to support you in your golden years. Unless you have significant real estate or investment income, your business will need to fund nearly every cent of your retirement. So, how do you do it?
Thuy Lam, a senior financial planner and money coach with Objective Financial Partners, works with both sole proprietors and employers with staff or contractors on their payroll. Saving for retirement as a self-employed person is possible, she says, but it requires both discipline and creativity.
“I would say that the world of investment opportunities is open to you,” Lam says. In fact, self-employed people can use some tricks their employed friends can’t to put aside more for retirement every year.
Every Canadian is eligible for the Canada Pension Plan (CPP) if they’ve worked in the country, and anyone over the age of 65 who meets the eligibility requirements can also qualify for Old Age Security (OAS) and the Guaranteed Income Supplement (GIS). The latter two programs aren’t directly funded by taxpayers. But CPP has a catch: As a self-employed person, you pay both the employer and the employee contributions, which is an added expense compared to being employed by someone else.
Lam says there isn’t a clear answer on how much to save fore retirement, though there are helpful retirement planning tools available online, such as the Retirement Budget and Retirement Cash Flow calculators on the Ontario Securities Commission’s Get Smarter About Money website.
“My advice always starts with cash flow, being in tune with what’s going in and what’s going out,” Lam says. That means getting answers for the following questions:
Once you’re able to understand these dynamics, Lam says, you can start working backwards to figure out how much money you should be setting aside now for retirement.
A rule of thumb is to set aside between 15% to 20% of your take-home income for retirement. This is higher for self-employed workers than other Canadians, who are typically told to save around 10%. Self-employed Canadians tend to pay higher contributions towards CPP and other taxes.
Another rule, Lam offered, is to save roughly 25 times the amount of money you’d need for a year.
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Once you figure out how much money you need to retire, there’s the question of where to put it. Many workers, including those with employer-supported pension plans, save money in a registered retirement savings plan (RRSP). Maxing out any remaining contribution room is always an important strategy, but it is doubly so for self-employed people. Workplace pension plans cut into the maximum yearly allocation you can make to an RRSP, but as a self-employed person, you can put away far more than someone drawing a salary.
“If you are a sole proprietor, or if you’re incorporated and you’re paying yourself a salary, be sure to take advantage of maxing out your RRSPs,” Lam says, “because you have the ability to progressively grow registered assets.”
In 2024, the maximum contribution any Canadian can make to an RRSP is $31,560, or 18% of their earned income from the previous year, whichever is lower. Of course, any unused room in a previous year can be carried over to the next year. Don’t hesitate to do so if you’ve been lagging in your RRSP contributions.
Self-employed people often struggle with unpredictable income. Their restaurant, design studio or landscaping business might be doing great in one year, then fall flat the next. Or the small business can have periods of ups and downs throughout year. It matters that you save money in an RRSP because of Canada’s graduated tax system, as higher income earners pay a higher percentage of their gross income on taxes.
“You want to be able to [contribute to] your RRSPs in years when you have higher income, so you get the higher tax deductions,” Lam says.
On top of maxing out RRSP contributions, Lam suggests self-employed people should also make use of tax-free savings accounts (TFSAs). These accounts, as the name suggests, offer a temporary reprieve from taxes on anything in them, which can be great for self-employed people who may owe far more in taxes than their friends on a payroll. Of course, TFSAs aren’t just for cash; you can also add longer-term investments, like exchange-traded funds (ETFs) and other securities.
For self-employed Canadians who own real estate or other physical assets, including intellectual property, equipment and other business-related assets, selling it off could give your retirement nest egg a significant boost. It’s a popular strategy: according to a 2023 report by the Canadian Federation of Independent Business, roughly $2 trillion in business assets is set to be sold in the next decade, and three-quarters of owners who plan to sell are doing so to fund retirement.
However, as BDC (Business Development Bank of Canada) points out, depending on a business sale to fund your retirement can be tricky. “Selling to an outside buyer could allow you to walk away with a very comfortable nest egg: an outside buyer is more likely to offer a higher sale price,” it says on its website. “However, outside sales can often be more turbulent than other choices.”
The process of assessing your business for sale is something you should absolutely leave to the experts, namely a succession planner and a financial advisor.
Regardless of how you decide to put aside money for retirement, Lam says you should be as consistent as possible with contributions to your nest egg. That isn’t always possible in the feast-or-famine world many self-employed individuals live in, but paying attention to your retirement now is what will help you enjoy it down the road. “Sometimes, self-employed individuals, we forget about ourselves,” Lam says, “and we focus on business.”
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How come there is no mention about IPPs or PPPs for incorporated small business owners or entrepreneurs?
Also, should incorporated small business owners max out their RRSP?