Self-employed? Work part time or on contract? Set up a pension plan!

It’s time to set up your own pension plan!

As an entrepreneur, you’ve worked long and hard to establish your business and earned the right to be your own boss. There are definite perks to being your own boss, but one of the drawbacks is that you can’t fall back on company sponsored pensions or retirement funds.pension plan

And it’s not just the self-employed that may find themselves vulnerable come retirement. People who work part-time or on contract may have little or no company pension to support them in retirement.

“Whatever your work arrangement, if you don’t have a company pension waiting for you in retirement, you need to be more strategic and more aggressive with your savings. You need to be constantly mindful of reducing debt and maximizing savings during your working years, so that you don’t suffer a cash shortfall and need to turn to debt in retirement,” says Jeff Schwartz, executive director, Consolidated Credit Counseling Services of Canada.

“You need to act now to become versed in your financial options, so that you can make the most of your financial options for the future,” says Schwartz.

If you are self-employed, work part-time or on contract, or if you want to boost your own savings in general, here are some tips on how to set up your own “pension plan”

How much?

The most effective way to achieve your savings goal is to determine first of all how much you’ll need to support yourself in retirement. It’s a good idea to meet with a financial advisor or a representative from your financial institution to help you nail down what you need. To start, here is a guide from the Government of Canada that can help you determine what you’ll need for income during your retirement (based in part on your income now, your age, and planned age to retire). It also takes into account other post-retirement benefits, like Old Age Security (OAS) and the Canadian Pension Plan (CPP).

When you have an idea of what you’ll need, you can develop a plan as to how you’ll achieve that goal.

Specifically for business owners

A recent poll from BMO Wealth Management found that most private business owners are unprepared for retirement financially and are likely facing a retirement funding shortfall.

The poll also shows that most business owners are counting on selling their business assets in order to fund their retirement, but a third of respondents said that they don’t know what exit option to consider.

The other issue here is that business owners are relying too heavily on the assumption that they’ll be able to sell their businesses for the required amount in the future, which is a risky move.  You never put all of your eggs in one basket. More liquid savings need to be part of the mix.

Diversification is key

On the same note, many homeowners avoid cash savings assuming that they’ll be able to sell their homes to fund their retirement. That too is a risky move, because like selling business assets, that value depends on what the market declares the value to be, which changes. And what if you’re forced to sell for less?

Know your options

As a rule of thumb, reduce debt as much as possible, so that you can keep that gap of between your investments and your debts as wide.

RRSPs are an excellent choice to really leverage your retirement savings power. The investments that you hold inside your RRSP are more liquid than business assets or house equity and you get a tax benefit from your contributions.

Tax Free Savings Accounts (TFSA) are a good idea as well, because they let you accumulate savings, with a flexible withdrawal policy (and a generous contribution limit). You also don’t pay tax on the interest that you generate, which is a nice tax benefit as well.

Are you nearing retirement, but your debt levels remain high? Take steps to start paying that debt down today so that you can focus on saving for your retirement. Get in touch with one of our trained credit counsellors at 1-888-294-3130. If you prefer, visit our online debt analysis.

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