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Retirement: A danger zone for the self-employed 2005

Helen Walter and Keith Thirgood used to laugh when financial advisers approached them to talk about RRSPs. As self-employed designers, copywriters and audio-visual producers, the husband and wife team behind Capstone Communications Group in Markham, Ont., struggled with unpredictable revenue, sporadic cash flow and debt from business and student loans.

Saving for retirement "seemed like a pipe dream," says Ms. Walter.

"Everything we earned went to the business and toward taxes and living expenses," she recalls. "How on Earth could we even start thinking about putting money away for retirement?"

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For many independent workers - those who labour not as hired employees but as contractors or suppliers of services - Ms. Walter and Mr. Thirgood's story is all too familiar.

As they work to build their business - or, in some cases, ensure they have enough work to sustain them through the year - independent workers often fail to save for retirement until it's too late, say financial planning and business experts. As a result, many face lean retirement years, and some may not be able to retire at all.

"These people are going to be basically dependent on their own resources when they retire because they won't have employer-sponsored pension plans to draw from," says Rick Robertson, associate professor of managerial accounting and control at the University of Western Ontario's Richard Ivey School of Business in London, Ont. "If they're leading a reasonably comfortable lifestyle now, they'll be in for a shock when they no longer have the income coming in from their business."

It's not that independent contractors don't believe in building a nest egg, says Harry James, of MGI Financial in Markham, Ont. Many just keep putting this off as something to do once they've paid off everything else, such as a business loan or back taxes.

It doesn't help that their incomes tend to fluctuate, making it difficult to set and follow a budget, let alone a retirement plan.

"I have had so many clients in this situation who would say, 'I'll put an RRSP in place once I have this many clients and my revenue reaches a certain amount,'" says Mr. James, who about 12 years ago became Ms. Walter's and Mr. Thirgood's financial adviser.

"Then, when they reach that level, they'll say, 'I should probably pay down this debt first before I start saving.' Then time goes by, and maybe they take on employees who they now have to be responsible for, or they have a few bad years, and the next thing they know they're 55 years old and they've built a great business and maybe made a lot of other people money, but they neglected to create something for themselves."

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A common mistake self-employed Canadians often make, says Mr. James, is living on their gross income and then scrambling at the end of the year to find money to pay income taxes. So instead of being able to put aside any excess cash at year end for their retirement, they end up sending this money to the tax man.

Mr. James says independent contractors need to make retirement savings a non-negotiable part of their list of monthly payables, along with the mortgage, phone and car loan.

But what if cash flow has slowed to a trickle and the next big cheque won't be arriving for another few weeks?

"Let's put it this way: They can figure out how to get gas in their car, put ink in their printers, pay their mortgage and put food on the table," says Mr. James. "They've got to take the same approach to their pension plan - they've got to make it a necessity, not a luxury."

This is exactly what Ms. Walter and Mr. Thirgood did, on the advice of Mr. James. Even though they weren't sure they could afford it, the couple began putting $100 a month into an RRSP and gradually started increasing their contributions. Most years over the last decade, they've managed to use up their maximum allowable contribution.

When cash flow was tight, they borrowed the amount for their RRSP contribution against a line of credit but always made sure to repay the loan as soon as payment for a project came in.

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Jim Cripps, a financial planner with Vancouver Financial Planning Consultants Inc., says borrowing to save for retirement is all right as long as the repayment can be made within one to two years.

But Mr. Cripps says independent workers should try to stabilize their cash flow by building an emergency fund equivalent to between three to six months' worth of living and business expenses.

"Instead of living hand to mouth from day to day, make the effort to build a substantial cash reserve," he advises. "This will give you peace of mind so you can focus on long-term results in both your business and your investments."

RRSPs are not the only retirement savings option for independent workers, say the experts. For those making, say, $40,000 a year or higher, a tax-free savings account may make more sense since the tax benefits of an RRSP are greater for those with higher incomes.

Jamie Golombek, managing director of tax and estate planning for CIBC's private wealth management arm, says contractors with incorporated businesses may want to consider paying themselves with dividends from the company - as opposed to a salary - and leaving any excess cash in the corporation.

This strategy can reduce taxes, says Mr. Golombek. The company can then take the excess cash, including money saved on taxes, and put it toward an investment portfolio under the company's name.

Come retirement time, the contractor can sell these investments and take the after-tax proceeds as a dividend. This strategy could result in more after-tax money for the incorporated contractor, says Mr. Golombek.

"Your accountant should be able to run a model to determine if this is the best strategy for you," he says.

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