Self-employed? Here are five tips to help you retire comfortably

Are you one of the 2.9-million Canadians who Statistics Canada says are currently self-employed? Then you’re likely aware that along with freedom and independence comes unpredictable cash flow. And that unpredictability can make building a solid retirement plan a bit of a challenge.

The average retirement age for self-employed Canadians in 2022 was 68. That’s four years older than the average Canadian retiree.

So if you’re self-employed and planning your retirement, a Sun Life advisor like Andrew Wilkin¹ can help.

From RRSPs to building a self-employed pension, here are his top tips for retirement planning.

1. Stick to what you’re good at and farm out the rest

For most freelancers, that means taking the time to track down a good accountant, lawyer, and financial advisor.

But don’t leave it at that.

“Talk to your advisors routinely. Commit to meeting and reviewing your situation with them on a regular basis,” says Wilkin. “It’s fine if things haven’t changed much in your own life. But what about the Income Tax Act? Or maybe there’ve been changes to the Canada Pension Plan (CPP) or eligibility for Old Age Security (OAS). These things can have a big impact on your plans. A good advisory team will keep you up to speed.”

2. Pay yourself first

 “It’s easy when you’re self-employed to want to look after everyone else,” Wilkin says. “Trouble is, sometimes nothing is left over at the end. So, try to reverse that.”

Set up automatic deposits to high-interest savings accounts. Deposit money into your RRSP when you get a cash windfall. Build out an investment portfolio.

All these things will put you on a path toward a comfortable retirement.

3. Use RRSPs and TFSAs in tandem

Wilkin sees a tax-free savings account (TFSA) as the perfect tool for freelancers. Why? First, investments held in your TFSA grow tax-free. And second, you can withdraw your cash whenever you want to tide you over in leaner years.

Unlike registered retirement savings plans (RRSPs), however, you can’t deduct TFSA contributions on your tax return. This leads to Wilkin’s rule of thumb on how to choose between the two in any given year:

“At incomes of $40,000 a year or less, I like to steer people toward TFSAs,” he says. “If your income is over $40,000, you may be better served by a combination of the two. Once you’re into six figures, you want to be maximizing your RRSP [contributions]. As well as have some money go into TFSAs.”

Just remember: once you convert your RRSP to a registered retirement income fund (RRIF) or an annuity and start drawing it down, the cash you take out will be taxed as regular income at your marginal tax rate.

4. CPP: Handle with care

As of June 2023, people who just started collecting at age 65 received an average of $772.71 in CPP benefits a month. If you plan to keep working past that age, the regular payout can add stability to your cash flow. You can begin drawing CPP as early as 60, with a reduced benefit. Or as late as 70, with an increased benefit.

You don’t have to stop working to start collecting CPP. But there are a couple of things you need to keep in mind. This includes how CPP can affect your tax bill.

“It’s nice to wake up on the first of the month knowing you have X amount of dollars coming in,” Wilkin says. “But sometimes people spend the money without making provisions for the fact that CPP is taxable. As a result, the income from their business, along with CPP, may push them into a higher tax bracket.”

Then there’s the question of when to start collecting. Are you unsure when to take CPP? Consult with an experienced advisor and/or accountant to determine which age will best serve your own situation.

5. Get the right insurance

Insurance is critical for self-employed Canadians since they don’t get coverage through an employer. Consider personal health insurance for benefits like eyeglasses, dental care and prescription drugs. Disability insurance, meanwhile, can replace part of your income if you lose your ability to work. An advisor can help you determine which type of coverage is right for you.

What’s the bottom line on retirement planning in the gig economy?

Keep working if you love what you do, but always have a plan.

“One way to be honest about whether you’re still passionate about work is to ask yourself one question. If you’re in a position financially where you could walk away, would you still do it?” says Wilkin. “If the answer’s yes, then you’re in it for the right reasons.”

This article is meant to provide general information only. Sun Life Assurance Company of Canada does not provide legal, accounting, taxation, or other professional advice. Please seek advice from a qualified professional, including a thorough examination of your specific legal, accounting and tax situation.