Self-employed and not sure how to plan for retirement? Here’s how to get started

There are two mistakes I often see with my entrepreneur clients when it comes to retirement planning. The first is assuming retirement savings will magically appear down the road, when the cash flow of the business gets stronger. The second is that the business itself (and hopefully selling it) is the retirement nest egg, and that the proceeds will be enough to cover the full cost of their golden years.

While these two things can definitely happen, they don’t in many cases, or the money simply isn’t enough. As time marches on, and with inadequate retirement savings habits, there’s also foregone compound interest and reinvested returns that would otherwise help that money grow.

If you’re self-employed, it’s even more important for you to take the reins on investing for your retirement, because you’ll receive no help from anyone but yourself.

Getting started can be simple

The basic accounts you’ll need are an RRSP and a TFSA, and it’s important that the money going into these accounts is invested very well so that it can grow as quickly as possible.

I’m often asked what’s best — RRSP or TFSA: 95 per cent of the time the answer is that they both play an important role in helping you get prepared for retirement, so plan on participating in both.

The RRSP helps you save money on personal taxes today (you pay these taxes upon withdrawing money in retirement), and the TFSA is funded with after-tax dollars today, which means you save money on taxes down the road. You see, they both function to help save you taxes, it’s just that they approach it from different time lines, offering unique advantages that make both accounts helpful.

The specific amount of money going into each account should be planned out with your financial adviser (you definitely need one of these pros on your financial dream team if you’re an entrepreneur) and your accountant.

Depending on how much you’re paying yourself personally from your business, it could make sense to prioritize more savings to one of the accounts over the other. Each plan has limits on how much money can be contributed. As well, you can put a variety of investments within the RRSP and TFSA, from GICs to stocks to ETFs to mutual funds. Your contribution room is also carried forward indefinitely, so if you can’t contribute one year, you can make up for it the next year.

The goal however, is to fund these accounts as much as you can annually so that your carry-forward room doesn’t get too massive. Once the RRSP and TFSA are maxed out, it often makes sense to open a non-registered investment account and start adding money to that.

Consistency is key

A super common money characteristic among self-made millionaire entrepreneurs is consistency.

They consistently make their personal finances a priority by ensuring they are doing whatever possible to save for retirement.

They consistently meet with their financial adviser to discuss and adjust their investment strategy.

They consistently make contributions.

Contributions can be automated at a pace that works for you; monthly, biweekly, weekly. And, as all entrepreneurs know, as cash flow to your business changes, you can change these automations to suit what you can afford, and/or make extra lump sum contributions in the instance you have a really good streak of cash flow and want to capitalize on that excess money. My advice though is that no matter the cash flow, try to make consistent contributions even if they have to be smaller for a period of time.

The total amount required for your retirement is going to be dependent on the kind of lifestyle you want to lead in your golden years. A financial adviser can help you put super concrete numbers behind this vision. As a baseline, I like to recommend you plan to have about 15 times your current household salary as a target for your nest egg — again, this is a baseline that needs adjusting depending on your goals.

For some small business owners, it might make sense to look into individual pension plan options that are set up through specific financial institutions. Or, consider offering RRSPs or Deferred Profit Sharing Plans to your team working in your business. In many cases, the administrative costs and contributing to these kinds of retirement savings plans for self-employed people are tax-deductible to the business.

Only good things can come from being extra mindful about your retirement when you’re a business owner. You’ve clearly got those big-thinking skills in hand because you’re running a business; so just apply them to this part of your life. If you happen to sell your business for whopping amounts of money, congratulations — but consider it gravy.

This article was originally published in The Star. Lesley-Anne Scorgie is a Toronto-based personal finance columnist and a freelance contributing columnist for the Star.