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How to retire when you're self-employed

Think a retirement party will never happen is you're self-employed? It can happen. (Thinkstock)

Go looking for a “retired freelancer” and you might as well be searching for a unicorn.

The inconsistent pay and the fluctuating income have many self-employed people, especially freelance writers, believing they'll never retire at 65 or any age.

When asked about his chances of retirement, David Hayes, an award-winning freelance journalist based in Toronto, just laughed at the prospect.

But there are self-employed people who have seemingly achieved the impossible and retired, along with even more who are looking to retire, so we talked to the people who've done it, along with financial advisors who told us what it takes to pull it off.

More than half a million Canadians join the ranks of the self-employed every year and 1.5 million of them reported having unincorporated businesses in 2014, so retiring as a freelancer has become a realistic consideration for more people than ever before.

One of those people is Marty Wolfson. Both he and his wife are self-employed (he's in I.T. and she's in massage therapy) and both are heading towards retirement.

“I'm downsizing – I started five years ago – so I've been working much less,” says Wolfson. “Rather than putting in 40 to 60 hours, I'm putting more like 20 to 30 hours in and I'm putting all my retirement financing in place.”

Should Self-Employed People Incorporate?

The financing he speaks of includes putting more money aside, hiring a financial advisor to do an in-depth analysis of his and his wife's lifestyles relative to their income and consolidating all of their financial accounts. Now in his 60s, Wolfson was also advised to stop contributing to an RRSP and incorporate his freelance business.

“I stopped with the RRSP because of my age. According to the financial advisor, it made more sense to incorporate a company and because I incorporated a company I was able to keep my income in the company, so when I'm 70 I don't have to take it out because it's private and I have more control over it,” says Wolfson. “I can take out $2,000 a year for 30 years rather than take out $60,000 all at once.”

However Fred Bowie, CEO of the Canadian Retirement Information Centre – an Ottawa-based financial services corporation specializing in customized retirement solutions – questions whether such a move is worth it.

“In a sole-proprietorship you're still taxed on an individual basis and even a corporation is eventually taxed when you take the money out. There may be benefit to being incorporated early on, but eventually you're going to have taxable income, even if it's taxed at a lower rate as dividend income,” says Bowie. Add to that the filing fees and having to file another tax return, and incorporating a business may not be worth it unless your income is high enough.

Try a TFSA

Instead, freelancers should consider putting their retirement savings into a Tax-Free Savings Account.

“Most freelancers probably don't contribute to RRSPs and the ones that do, who are doing very well, should look for other tax-efficient ways to save money like a TFSA,” says Kelvin Rampersad, vice-president of business development at Carte Wealth Management – a mutual fund dealer in Ontario and Quebec.

“[The TFSA] is a true tax savings and because the government upped the limit to $10,000 in 2015, it's actually more worthwhile to do that because the RRSP is just a tax deferral where you'll end up paying the tax.”

How Much Should Freelancers Put Away?

No matter what investment vehicle any freelancer uses to build their retirement, the boom and bust periods in their income leave many wondering how much money they can realistically save.

“I'm going to admit to not being a financially savvy or organized person, so for me it was, 'What can I afford to put into my RRSP?' says Paul Lima, a Toronto-based professional freelance writer and freelance writing instructor for over 25 years who admits that while he still teaches a few online courses, he has basically retired from writing full-time.

“I would recommend though that people put away ten to 15 per cent of their income,” Lima continues.

Ten per cent is exactly what Kelvin Rampersad recommends when advising financial planning clients on how much they should put away for retirement. Fred Bowie goes a little higher than that, recommending 12 per cent for those freelancers who contribute annually to an RRSP or Canada Pension Plan and 18 per cent for those who do not.

“We recommend that you accumulate $20 for every dollar of retirement income that you require,”says Bowie. “This may sound unrealistic, but that guarantees you solid retirement income if that's the stage you want to be at.”

Rampersad believes that not only does 18 per cent sound unrealistic, it is unrealistic.

“The cost of living is too high and the average Canadian only puts away about two per cent of their income for retirement when they should be doing ten because the cost of living has ballooned so much,” he says.

“Also, people's wants are greater than their needs and they don't envision retirement right now because why should they? Most people under 40 believe retirement is for old people, so you need to think like an old person if you want to retire in comfort.”

The one thing Bowie and Rampersad definitely agree on is that no matter how much money a freelancer puts away, they need to start early.

“You need to start from the first day you start working,” says Rampersad, with Bowie agreeing that the earlier you start, the more the compounding dollar figures generated in those years are too good to pass up.

Grab a Coach and Create Your Retirement Vision

No matter the investment tools you use, or the percentage of money you put away, every freelancer needs a vision for their retirement and a plan to get there.

“How much money you need to make so you have enough to put away for retirement depends on how rich a life you want financially, emotionally and in terms of what you're doing,” says Lima. “People don't think about that, so I'm suggesting people think about that and talk to a financial advisor to figure out how much money they need.”

People like Bowie or Rampersad would be happy to sit down with any freelancer to assess their investment risk tolerance, measure their assets and liabilities against their sources of income and create plan that will help them retire comfortably.

“Think of me as a financial doctor where you tell me what's happening and where you want to be and I'll help you to get there,” says Rampersad.

Quarterly meetings with a financial advisor can also help freelancers stay disciplined in putting money away during the leaner times of the year when it may look impossible to make a contribution. Plus, most financial planners get paid by the financial institution where the client's investments lie. All the freelancer has to do is keep in touch and a financial advisor can do the rest.

“I'm like a financial coach and most successful people in this world have a coach or mentor to help them get to where they want to go in life,” says Rampersad.