If you’re self-employed, you’re probably familiar with the perks, like greater flexibility in your schedule, the ability to refine and direct your career – even simple things like getting to wear whatever you want. But retirement savings is something that many entrepreneurs don’t think about, while others simply don’t know where to start. Take control of your retirement savings to give yourself solid financial footing now and in your retirement years.
Change Your Thinking About Retirement Savings
When you think about saving for retirement, you likely think of the big picture: the whole amount you need to sustain you in your golden years. Focusing on a large number can make the process seem a bit intimidating. But what if you think about it the same way you think about regular expenses like printer paper and travel costs? Those expenses are a necessary part of running a business – you find a way to meet those expenses.
Retirement is just as important. If you eliminate saving for retirement, you don’t have as much financial stability in the future. Don’t worry about the big picture; instead, think of retirement savings as an essential business expense. The difference between proper retirement planning and poor planning can be hundreds of thousands of dollars over the course of a career, so it’s important to dive in instead of avoiding the topic because you’re unsure. Improving your financial literacy can help you reduce the risk of losses in your retirement accounts and maximize long-term returns, while helping you understand exactly how much you need to save.
Pick a Retirement Age
Are you unsure what retirement goals to set and how to get started? The first step is to figure out the target age for your retirement. Most Canadians qualify for the Old Age Security pension and Canadian Pension Plan at age 65, which gives you a good starting point to determine when to retire. Choosing the right retirement age is often both a personal and financial choice: Many people would love to retire sooner rather than later but cannot afford to do so. Retiring earlier may mean you have to take a lower income in retirement if you don’t save enough over the years.
Figure Out Your Retirement Income
Once you figure out your retirement age, you should determine how much income you need in your retirement. For example, say you decide that at age 65 you need $50,000 a year in retirement income, growing at 3% inflation, until you reach the age of 90. That means you need over $1.9 million in total retirement savings. It’s important to note that this doesn’t factor in investing or other retirement income streams.
The Canada Revenue Agency (CRA) Canadian Retirement Income Calculator can help you figure out your various retirement income streams. This tool helps you estimate what to expect during your retirement so you can decide how much additional money you need to save to supplement your future income after you retire. It factors in income streams, such as the Canada Pension Plan and OAS, as well as any other pensions you qualify for from previous jobs. Once you determine your annual shortfall, you can figure out how much of a nest egg you need to save.
How Much Should You Save?
Breaking your retirement goal into smaller targets can help the end goal amount seem easier to achieve. If you want to have $1 million after 30 years, you need to invest $1,025 per month in an account that makes an average of 6% a year in interest. The more time an investment has to grow, the more it increases in compound interest. In the example above, the $1,025 per month investment over 30 years results in a total of $369,000 in total contributions. Earning 6% a year for 30 years accrues total interest of $635,385, or nearly twice the amount originally invested.
Typically, most people saving for retirement can’t divert a large portion of their income into retirement, especially in the early stages of their careers. A more feasible approach is to increase the retirement savings level as your income increases. You could do this by automatically deducting a certain percentage of your pay every month into your retirement savings account, for example. As your income increases, so does your savings amount, in a proportional way.
What’s the Best Way to Save for Retirement If You’re Self-Employed?
You have a few different options for retirement savings as a self-employed individual. One of the most popular options is using a registered retirement savings plan (RRSP). These plans allow business owners to deduct up to 18% of their income to a maximum of $26,230 in 2018 and $26,500 in 2019. You need to earn more than $145,000 per year to reach the maximum 18% deduction.
Another method of saving is through a tax-free savings account (TFSA). This option isn’t tax-deductible when you contribute to it, but any interest or growth on the account when you withdraw for retirement is tax-free. For 2018, the highest annual contribution amount to a TFSA is $5,500 with a total cumulative limit of $57,500.
Deciding which is the better option depends on your tax situation. The RRSP gives your company an income tax deduction, but you may need to increase your salary to maximize the contributions. Otherwise, your contribution comes in under the limit, which means you’re leaving potential retirement savings on the table. A TFSA is also a good choice, but the $5,500 maximum may not be enough to help you reach your retirement goals. You can start both options at many financial institutions with a variety of options.
Start Small If You Have To – But Start
Whether you’re a 25-year-old freelancer with all the time in the world or just around the corner from retirement age, there’s no rule that says you have to contribute thousands of dollars at once to your retirement fund. Even if you can only contribute $100 a month, it counts. You can always increase that amount once you feel more secure. Depending on the type of retirement savings plan you choose, you may be able to increase your contribution amounts gradually or contribute different amounts each time.
For example, imagine you start saving for retirement with a modest $50 monthly investment and can earn a moderate 6% annual rate of return. Over 40 years, that $50 per month investment turns into $100,000. Push your savings rate up a little higher, and you can quickly see how your savings grow. You don’t need to start with much, but make sure you get started. The earlier you start, the longer you have to let your retirement savings grow larger. People who start saving for retirement at age 40 or 50 have less time to save and grow that amount. The ultimate goal is to increase your savings rate up to 15% of your salary or more.
When’s the Best Time to Start Saving for Retirement?
There’s no perfect time to start saving for your retirement when you’re self-employed. You may have periods of uncertain income and plenty of expenses to pay. It’s better to put aside even 1% or 2% of your income right now than to arrive at retirement realizing you didn’t start soon enough.
If you’re middle-aged and haven’t started saving for retirement, you can still start building your retirement savings. You may require extra savings and maybe a few extra years in the workforce, but a comfortable retirement is still within your reach. The best way to figure out what you need to do is to conduct an honest assessment of what you want your retirement to look like. Estimate major expenses, such as food, rent, travel, insurance, and medical expenses. Once you determine how much your retirement costs, then you can work on figuring out how much you need to save to get there.
If you need to strike a better balance, look at ways to cut back. You can consider travelling only part of the year or downsizing your home. You can also look at where you can cut back spending to boost your future savings. Crunching the numbers now is better than finding out too late that you don’t have enough.
Make It Automatic
If you have to write a cheque every month to add to your retirement savings, it’s much easier to either forget or decide you don’t have the money to contribute. You can avoid those situations by setting up an automatic savings plan. Arrange to have money withdrawn automatically from your chequing account and deposited into your retirement account.
Whether funds go into an official RRSP, TFSA, or some other separate savings account, an automatic withdrawal can be a great way to put a bit of money aside without having to think about it. Be sure you set the amount to one you can afford to do without every month – depending on the type of account you transfer the money to, there may be penalties or stringent conditions if you want to get that money back.
Hire a Financial Advisor
Working with a financial advisor can help you plan for your retirement if you still have questions or aren’t sure which option is best for your situation. There are dozens of websites with lists of highly rated investment funds and products, but sometimes it takes an expert to help put it all together. A financial advisor can guide you on how much you should save, what investments you should be putting your money into, and even tax and post-retirement planning.
You most likely consulted an expert for advice when you were getting your small business up and running, and saving for your retirement is no different. Whether you have a dedicated financial advisor or aren’t sure where to start, it’s important to consult an expert when it comes to saving for your retirement. They can help you design a savings plan that suits your business and your retirement goals, and advise you on certain retirement savings plans.
Saving for retirement when you’re self-employed takes discipline, strategy, and a commitment to see it through to the end – all things you’re already doing in your small business anyway. Keep track of all your retirement contributions in your accounting software. The QuickBooks Self-Employed app helps freelancers, contractors, and sole proprietors track and manage their business on the go. Download the app today.