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How to Plan for Retirement When You’re Self Employed

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Being self-employed means that you have to handle most or all administrative tasks on your own, and that includes planning for retirement. A lot of people associate being self-employed with instability, and having retirement being taken care of by your employer is one of the reasons many decide to stick to a day job.

But retirement as a self-employed person doesn’t have to be uncertain. All you have to do is plan properly. There are plenty of options open to you that will make sure that you can retire comfortably. Let’s take a look at how you can plan for retirement when you’re self-employed.

Speak with an Advisor

There are so many options when it comes to retirement, and they all have different benefits for different types of earners. A retirement planning advisor will be able to look at your situation and what you expect it to be in the future. They’ll then be able to look at different financial products and see which ones would be the best suited for you.

Another thing they’ll be able to do is give you an idea of how much you can expect to earn in the future based on how you invest it. They’ll be able to tell you how much your investments could accrue depending on the amount you invest and annual returns. This could allow you to re-adjust your investment options, contributions, or strategy.

Look at Robo Advisors

Another great option would be to go with Robo advisors. Robo advisors are one of the simplest ways to invest money, and they can be extremely efficient. The Robo advisor will ask you questions about your income level, investment goals, age, risk tolerance, and more so they can get a sense of your profile as an investor. They will then build a portfolio based on this.

The best feature of Robo advisors when it comes to investments is that they will constantly rebalance your assets depending on the market and to make your investments as tax efficient as possible. For instance, if the bonds market is particularly strong that year and you had a portfolio that consisted of stocks at 80% and bonds at 20%, then the balance could shift to 70% in stocks and 30% in bonds.

Another thing Robo advisors can do is readjust the level of risk depending on your age. For instance, they will start going with more secure investments as you get older and riskier investments when you are younger and more tolerant to risk. You’re also better equipped to deal with loss when you’re still earning at your full potential.

Another very important benefit and advantage Robo advisors have over human advisors is that they are less likely to make suggestions based on what would benefit them and not their client. For instance, it’s not uncommon for financial advisers to get a kickback from an investment fund for funneling clients to them. Not all financial planners are ethical, and you take the human element out completely when dealing with a Robo advisor.

Look at RRSPs and TFSAs

You should also consider looking at RRSPs if you want to both save for retirement and save on your taxable income. With RRSPs, you are allowed to contribute either 18% of your total income or $27,230 per year max. The lowest of the two will be your limit.

This comes with tons of tax implications. For instance, if you earn $90,000 and you make a $10,000 contribution that year, this means that you’ll only be taxable for $80,000. This also means that you could be taxed at a lower rate, which will allow you to save even more.

So, if you haven’t looked at these already, we suggest you get as much information as you can on them. If you want to learn more about how do RRSP work, we suggest you check out the linked article by WealthSimple. They go over the benefits of going for a Registered Retirement Savings Plan, and some of their restrictions. They also explain the differences between an RRSP and a TFSA, which is another very popular option for self-employed workers.

TFSAs are often mentioned when speaking of RRSPs and are similar in many ways. Both allow your investments to grow without being taxed. But one of the biggest differences between the two options is that the money you contribute to your TFSA will already be taxed as it will come from your net income, so there will be no tax benefits when making deposits. However, this also means that you can withdraw money from your TFSA without having to pay taxes on it.

With RRSPs, withdrawals are taxable events, so that means that your future and current financial situation will be the main determinant when choosing which option of the two is the best.

For instance, if you’re making more money now, then it would be a better idea to put your money towards an RRSP. This way, you’ll be able to save more on taxes now. Not only that, but you will likely earn less at the time of retirement, meaning that you’ll be in a lower tax bracket when the time comes to cash in.

This is why you must learn the differences between the two and speak with a professional that will give you a clear idea of which one would be the best depending on your goals, income, and investment timeline.

Automate Your Savings

At the very least, you should think about setting automatic transfers on your accounts. One of the things that people love the most about being employed with a company is that they don’t have to worry about contributions. With automatic transfers, you’ll get the same peace of mind. You could set up your accounts to contribute automatically to an RRSP, TFSA, or savings account.

Make Regular Contributions

You also shouldn’t stress yourself with the money you invest. With the magic of compound interest, even a small investment can quickly balloon over the years.

For instance, if you invested $10,000 at 30 with a 4% interest and reinvested that money year after year, this investment would be at $39,460.89 over 35 years. This means that the most important thing is making contributions and making sure they’re consistent.

Even investing as little as $500 in an RRSP over 40 years could yield as much as $77,000. The point here is to either start early or try to catch up with the time loss until now by maximizing your contributions.

Start Budgeting

This is also the perfect time to start a clear budget and include retirement as part of it. Most people know they should make a budget, and if you aren’t already, you’re probably leaving a lot of money on the table.

Budgeting will allow you to see exactly where your money is going and make the proper adjustments. You might find out that you have many more opportunities to save than you thought, and all that money could go towards your investments.

Your budget needs to include your income after taxes, expenses, debt, and objectives such as contributing to your retirement account and saving towards an emergency fund.

Look into Insurance

You also have to make sure that you start looking at insurance. To be able to save, you have to be able to earn, and there’s no guarantee that you’ll be able to for various reasons. You also have to be prepared for any event, like unexpected medical emergencies, for instance. Or, you might face a lawsuit in the future. If you’re in a field where this is a possibility, you may need to start looking into things like liability insurance. The most important thing is making sure that you’re sheltered from financial shocks so you’re not hit when you’re at your most financially vulnerable stage.

Always Improve

You also have to make sure that you maximize your ability to earn right now. One of the best ways to do so is to invest in your education. And guess what? RRSPs have provisions that allow you to withdraw money from them free of charge if you want to invest in your education.

Refining your skills will allow you to either get better jobs or offer new services. If you have employees, then you have to make sure that they stay up to date as well. Also, work on your networking so you can find even more opportunities to grow your income.

This would also be the perfect time to start looking at ways you can improve your health. Not only will it maximize your earning potential, but it’ll make sure that you’ll be able to fully enjoy your retirement years.

So, if you were concerned about how to plan for your retirement while being self-employed, we hope we were able to help. Make sure that you speak with a professional, but also that you look at these options on your own so you’ll be sure that the final decision will be in your best interest.

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