Saving for retirement is a life-long process. It should never be an afterthought especially if you are self-employed or operate your own business. As both the employer and the employee, the only company pension plan you get is the one you provide. And though government-administered plans like the Canada Pension Plan (CPP) are available, they’re not meant to sustain the rest of your retirement years. What you need is to choose and build a more reliable retirement plan for your future.
Setting a goal date
When planning for your golden years, the first thing you have to decide is the age you plan on officially retiring. The standard age of retirement in Canada is 65, though there are recent calls to update it to 67. The country’s citizens are living longer and choosing to work well beyond the normal age for retirement.
Of course, that choice is completely up to you but having a rough estimate of the age you want to retire can help you plan for it. First off, you can create a realistic debt repayment method. Choosing to retire early means you have to think about paying off all your loans at a specific age so it doesn’t affect your personal and business finances. Planning for your future is also connected to planning for your business, and knowing when you want to retire can help set more specific business goals. More importantly, you can calculate the amount of savings you would need at a specific age. This should be based on certain factors such as inflation and the lifestyle you want to maintain over a certain number of years.
Choosing your plan
There are three types of retirement plans available to Canadian citizens:
• Government-administered plans — CPP; Old Age Security Program (OAS)
• Employment-based pension plans — registered pension plans and retirement savings plans
• Personal retirement savings — Registered Retirement Savings Plans (RRSPs) and Tax-Free Savings Accounts (TFSAs)
Small business owners qualify for all three types. As mentioned, government-sponsored plans provide a basic income but are not sustainable for retirees. Having an employment-based pension plan, which you can set up for your workplace, can provide you and your employees with a pension.
However, personal retirement savings like RRSPs are highly recommended for entrepreneurs as these come with certain tax advantages. The contributions you make to an RRSP are tax deductible, which makes it ideal for business owners with a high income. But there are tax consequences for withdrawing from your RRSP early, or before retirement. On top of that, it loses the power of compounding in your account, which can be significant come retirement time.
A TFSA, on the other hand, doesn’t come with upfront tax benefits. Your contributions will, however, accumulate tax-free and your withdrawals will not be taxed. It is more ideal for business owners in a lower tax bracket.
What to do with the business
The third thing you have to consider is what you plan on doing with the business after you retire. Some people choose to transfer or sell the business, whether to family members, a business partner, employee, or a third party. This can boost your retirement savings. On the other hand, there are entrepreneurs who don’t plan on completely stepping away from the business they helped grow.
Again, the choice is completely up to you. Planning for retirement especially as a business owner entails a lot of decision making. Do you retire early or late? Do you start a company plan or a personal retirement plan? Do you sell your business in the future or will you continue to be involved? Knowing the answers to these questions can help you establish a better and more secure future.