What you save for retirement depends on what you can afford. Those with a steady income often find it easier to stash money away for the future.
But the self-employed often don’t have that luxury. Their income is dependent on their business, and even if it’s doing well, they sometimes reinvest any extra funds back into the operation. Retirement planning often comes later, if at all.
We asked three self-employed Canadians to tell us about their finances. Then we asked experts for their advice. Here is what they said.
Bradley Alexander, 44, piano teacher and musician, Toronto
Background: I grew up in the Scarborough neighbourhood of Toronto and started piano lessons at age 7 at my public school. I was a very competitive student and enjoyed being on stage at a young age. I started teaching piano in 1987, and today I do home visits and also teach in my home. I perform every Saturday night at a bar in Yorkville, and I also perform for corporate events and weddings.
In addition, I have worked for Carnival Cruise Lines since 2004 and do short contracts on cruise ships in the piano bars five or six times a year.
Income and savings: I have not always been very good with money, but I am much more careful now. I contribute $50 a month to my RRSP and I have it invested in low-risk mutual funds. I contribute also to my Canada Pension Plan when I file my taxes every year.
Retirement: Retirement is not really on my radar for several reasons. First, I really enjoy my work, and I can’t imagine living out my days without music. I know that I won’t be able to work on cruise ships forever, but I can always perform somewhere.
As a piano teacher I can teach from my home well into my senior years, and that in itself will provide a decent income. Teaching will keep me young, my mind sharp. I don’t see retirement as something to look forward to. I will of course work less and set my schedule up comfortably. I want to travel as well, so I will need decent income for that to happen.
Pamela Dries-Smoley and Stuart M.C. Smith, both senior wealth managers and portfolio managers at Scotia Wealth Management, Toronto
Bradley’s story is inspirational. Not many people can say they earn their living doing what they love and are passionate about. This probably means that Bradley has a long life ahead of him.
That said, his savings plan may not be enough. While his intention is to be able to supplement his government pension income and savings with his teaching and playing piano, something could happen that prevents Bradley from continuing to play or teach music.
It appears Bradley’s main sources of income in retirement will be payments from Canada Pension Plan and Old Age Security. Depending on his income, Bradley may not qualify for the maximum CPP, which is $1,092.50 a month for 2016.
Due to changes made to Old Age Security in 2012, Bradley will not be able to start collecting OAS until age 67, compared with the current age of 65. The current maximum OAS payment after the latest increase will be $570.52 a month.
Saving $50 a month in an RRSP is a great start, but depending on how long Bradley has been doing that, it may not be enough.
Saving $50 a month is a great start, but depending on how long Bradley has been doing that, it may not be enough. Without knowing how much savings he has built up, putting away that amount for the next 25 years (which takes him to age 69), at an average annual rate of return of 6 per cent grows to about $34,000.
He says he is invested in “low risk” mutual funds. If we assume that his average return is about 6 per cent, Bradley may have to live with some higher volatility in the shorter term in order to meet his longer term goals. If he lives for another 25 years past age 69, his current plan may not be enough. Here is an action plan for Bradley:
- Request a CPP statement from Canada Revenue Agency so he knows what his pension is tracking at based on his contributions.
- Put together a budget to determine what his expenses are and whether he can carve out more money for savings.
- Determine which regular expenses can be reduced or eliminated in retirement in order to understand how much he will need when he is not working full time.
- Talk to an investment adviser about the mutual funds he is invested in. He truly needs to understand the composition of his investment portfolio.
Once he has this information, a basic retirement income projection should be done so he understands what his current savings plan will provide at age 69 or 70. This will help him determine whether he needs to become more serious about saving and investing.
Guy Reichard, 41, executive life coach, Richmond Hill, Ont.
Background: I’ve always been self-employed. In 2001, I ran an IT service firm that evolved into an Internet marketing company. Eventually, I started a new career from scratch. I went back to school in 2009 for life and business coaching, and now I focus on just that.
On income and savings: Savings were never part of the equation. I had to let go of ideas of future security for a life of greater meaning, purpose and fulfillment.
On retirement: As a life coach, I have worked with a handful of people near or at retirement age, or just beyond it, who were experiencing an existential crisis. I listen but I don’t tell people how to retire, or how to save for retirement. I help them find a way to live that has meaning and fulfillment for them.
While I follow my own advice, I don’t see retirement the same way most people do. I envision being in my 70s and still wanting to help others. I just hope to be able to earn an income from it. I’m not saving for retirement through RRSPs – I gave those up years ago when I chose to invest in myself. I’m putting away money to invest in real estate, rental properties in particular.
Arpad Komjathy, certified financial planner and mortgage broker, Toronto
In Guy’s situation there are two main considerations: longevity and unexpected illness. First, most of us will not have the same productivity to earn income in our 70s as we had in our 40s.
Second, Guy is planning to help others well into his 70s, but will his health allow it? That is unknown and he should mitigate that risk by obtaining living benefit insurance: critical illness and disability coverage. Without them he may have to dig into his savings for treatment of illness and income replacement, and in case of a disability, he may not have the necessary income-producing working years to complete the buildout of his real estate portfolio. Here’s what I would recommend:
- Determine how much income he will need in retirement.
- Take into account any CPP and expected OAS, then figure out how much his investment portfolio will need to generate.
- Figure out how big of a real estate portfolio will be needed to generate the required cash in his retirement.
- Calculate the required down payment for the first real estate purchase and work toward saving that amount, and determine whether borrowing would help him secure it sooner. Calculate how the mortgage will be paid off over time (ideally before retirement).
Portia Wade, 44, freelance ballet coach and teacher, Toronto
Background: I grew up in Thunder Bay and got into ballet as a way to strengthen my figure skating. Then Laurel Toto of Canada’s National Ballet School came to my small town as a guest teacher. I was in awe of her. I later moved to Toronto and taught at various public and private schools. I also teach at the University of Toronto’s Hart House five times a week.
After the birth of my first child, I applied for a grant to establish my own company offering private ballet coaching. I launched Urban Ballerina in 2008 and now have students from all over the city.
On savings and income: I work three part-time jobs, all as a dance teacher, at different studios in Toronto. So I am a part-time employee who is also self-employed. Money is tight. In spring, the dance schools start to wind down and by summer there’s no work. It’s very unpredictable.
I’m on the poverty line, earning around $25,000 a year. I’m dancing as fast as I can to make ends meet. I don’t have much of a savings strategy because my income fluctuates with the seasons. Recently, I started putting away $30 a month into an RRSP. Better late than never, right? I now have two kids and I have to think also of their future.
Iftikhar Mahmood, independent certified financial planner, Markham, Ont.
The good news is that Portia has begun diligently saving toward her retirement. But this will not be sufficient for her, and she needs to consider these issues:
- Cash flow is crucial. She must understand where and when funds come in and balance that with funds out for rent, groceries, personal living and other expenses. It’s the first step toward planning for the future.
- Once she has an idea of cash flow, she could try to budget on a month-to-month basis. There are many free online tools available to help the self-employed reach their financial goals. A great one is mint.com.
- If Portia is reasonably able to save or put $30 a month into an RRSP, that’s great. But the tax advantages of RRSPs are more valuable to those with higher incomes. My recommendation would be to open a tax-free savings account (TFSA) instead, so she can create tax-free growth of her savings. In her case, she should invest that $30 a month into a TFSA that holds investments that match her risk profile. Of course if she has any debt at all, depending on the interest rates and type of debt, that would completely change my recommendations.