How to Plan Your Retirement When you are Self-Employed?

Are you self-employed? Here are some suggestions for strategies to implement and questions to ask yourself that will help you with the financial planning of your retirement.

Start early

Even if retirement can seem far away, it is in your best interest to start planning for it early in your career. Saving for the long term pays off much more if you start early, thanks to compound interest. Do it as soon as you have built up your emergency fund. Since you do not have a workplace pension plan, you are responsible for your own pension fund.

How much do you need to save?

To maintain your standard of living in retirement, try to save between 20% and 30% of your income. To do this, you need to set aside a little more money than a salaried employee. However, since nothing is deducted from your income, you could use this little extra to increase your savings. The important thing is to set goals and put money aside often. And if you have a good year, you could take advantage of it to increase your savings!

Contribute to the Québec Pension Plan

You would benefit from contributing to the Québec Pension Plan from the salary you pay yourself. Even if you have to pay both the employer's and the employee's shares, in retirement, the contributions would provide you with a guaranteed source of income for life, adjusted annually to the cost of living.

Which tool should you use: RRSP, TFSA, or VRSP?

Fortunately, there is no shortage of savings tools! You can use the registered retirement savings plan (RRSP), the tax-free savings account (TFSA) or the voluntary retirement savings plan (VRSP). Between the RRSP and the TFSA, which one is the most advantageous for you? It depends.

If you pay yourself a salary, you can accrue RRSP contribution room. RRSPs are advantageous because they reduce the income you pay tax on and allow you to save tax-free.

If you instead pay yourself dividends, a TFSA is the preferred tool because it also allows you to save tax-free. The savings invested in a TFSA can help you maintain your savings while your business grows. It is especially useful when you are just starting out as a self-employed worker and your income is still low and not heavily taxed. This strategy allows you to save while reserving your RRSP contribution room for later, when your income is higher and your business has matured. At that time, it could be advantageous to decrease the income on which you pay taxes using your RRSP. However, to do so, you will need to pay yourself a salary.

Diversify your investments

For your financial security, it is important to diversify your investments. Avoid betting everything on your business. It is risky to reinvest all your savings without saving for retirement, because you are putting all your eggs in one basket. It is better to diversify your overall wealth.

Could you contribute to an individual pension plan (IPP)?

If your business grows and you decide to incorporate, consider the option of an individual pension plan (IPP). It is a defined-benefit pension plan, you therefore know the amount of the pension you will receive in retirement in advance. It is intended primarily for one person, often an executive shareholder, but it can also include the shareholder's spouse or child, if they work for the same business.

The maximum contribution allowed under an IPP is higher than for an RRSP. Normally, the older a person is and the higher his or her salary, the higher the contributions allowed are. This is why an IPP is particularly attractive for shareholders over age 45 who pay themselves a salary. For more information on the individual pension plan, consult the Institute of Financial Planning's website .

Wait as long as possible before applying for your public pensions

If you can afford it, you could wait before applying for your pension under the Québec Pension Plan and the Old Age Security pension. You could receive the Old Age Security pension even if you do not pay yourself a salary. The longer you wait, the more the pensions increase, until age 72 for the Québec Pension Plan and age 70 for the Old Age Security pension. This way, you guarantee yourself an income for life, like a pension fund, at a low cost.

Should you purchase a life annuity in retirement?

You can also purchase a life annuity. It is a pension guaranteed for life that you can buy from an insurance company, for example. Its price depends on various factors, such as your sex and your age. In exchange, you will receive payments of a regular amount until your death. This solution would provide you with income for the rest of your life, while limiting the risks associated with managing your investments, as with a pension fund.

With one of these strategies, you will guarantee yourself a steady income and greater financial security, regardless of the duration of your retirement!

Do not hesitate to use SimulR and SimulRetraite, our retirement income simulator tools, to make calculations using your own data.