Retirement Planning for Independent Consultants

by Beth Rifkin

3 min read

As an independent consultant, you have the freedom to work with various businesses and control your own work schedule, but, with this freedom sometimes comes a lack of opportunities you would have as an employee in a traditional workplace. One of the issues that is not provided to a self-employed contractor is a retirement plan. With a variety of options and ways to save for retirement, you can financially prepare for your retirement with the proper plan and knowledge.

Picking a Retirement Age

Independent consultants have have a tough time creating their goals and the action to achieve them. The first step is to figure out a suitable age for your retirement. Most Canadians are eligible for the Old Age Security pension and Canadian Pension Plan at age 65, which might be 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 because they are not willing to take a lower income in retirement or they did not save enough before they retired.

Figuring Out Your Retirement Income

Once you figured out your retirement age, you should determine how much income you will need in your retirement. For example, if a retiree decided that at age 65, he would need $50,000 a year in retirement income (growing at 3% inflation) until he reached the age of 90, he would need to acquire 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’s 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 figure out how much additional money you need to save to supplement your future income after you have retired. It factors in income streams, such as the Canada Pension Plan and OAS, as well as any other pensions you may have qualified for in 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?

Determining how to save and how much you need to save can be one of the biggest obstacles in planning for your retirement, but, you need to break this down simply and on a manageable basis. If you wanted to have $1 million after 30 years, you would 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 will increase in compound interest. In the example above, the $1,025 per month investment over 30 years would result in a total of $369,000 in total contributions. Earning 6% a year for 30 years would accrue total interest of $635,385, or nearly twice the amount originally invested. Typically, most people saving for retirement cannot divert a large portion of their income into retirement, especially in the early stages of their careers. A more prudent method would be 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. As your income increases, so does your savings amount, in a proportional way.

How Do You Save For Retirement?

Once you have a rough estimate of how much you should begin to save, you need to figure out the best method. One of the most popular ways to save for retirement is using a registered retirement savings plan. These plans allow business owners to deduct up to 18% of their income (up to $26,010 in 2017) into the RRSP. Although, as a self-employed person, you would need to pay yourself a salary of almost $145,000 to maximize the 18% deduction. Another method of saving is through a tax-free savings account. Instead of being deductible when you contribute, any interest or growth on the account when you withdraw for retirement is tax-free. For 2017, the highest contribution amount to a TFSA is $5,500, and the maximum contribution usually grows every year by $500. Deciding which is the better option should be based on your tax situation. The RRSP gives your company an income tax deduction, but you may be forced to increase your income to truly maximize its contributions. A TFSA is also a good choice, but the $5,500 maximum may not be enough. Both can be started at many financial institutions with a variety of options, such as investment choices.

References & Resources

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