Self-employed vs. salaried: 5 things to keep in mind when it comes to retirement planning

For the self-employed, retirement savings always aren’t a priority. After all, they have to invest a lot of energy in developing their businesses, all while trying to maintain a work-life balance. But, unlike a salaried worker, if you’re self-employed you don’t get a boost from your employer when it comes to planning your retirement. Here are five things a self-employed worker should consider when it comes to retirement savings, because it’s never too late to start putting money aside, and saying Sayonara to your boss comes with serious responsibilities in terms of personal finances.

01Plan on irregular income

According to a 2017 poll carried out for the Canadian Payroll Association [in French], close to half of Canadian employees live from paycheque to paycheque and would have trouble meeting their financial obligations if their cheque was late by one week. Self-employed workers have plenty of good reasons to avoid this trap, because quite often, from week to week, their workload and income can vary greatly. That’s something that can be said for tip earners, too. However, despite this irregular income, saving for retirement has to happen every month anyway if you want to be secure when you are older. What’s more, sometimes clients take many weeks or even months before they pay their suppliers. That’s a long way from the steady bi-weekly or monthly paycheck enjoyed by salaried workers. The self-employed person has to plan for this sometimes precarious existence, without jeopardizing his or her regular retirement savings efforts.

Working for yourself also means thinking about paying income tax in instalments four times a year to both the federal and provincial governments. It’s a bit like the taxes withheld at source from a salaried worker’s paycheque. Instalment payments vary with income and they can quickly become substantial amounts you need to plan for when you decide to hang out your shingle. Best to budget for them along with your retirement savings contributions.

02Build a savings strategy

To juggle all these personal finance items, the self-employed worker has everything to gain from quickly setting up a savings strategy with help from a financial advisor.

Where do you start? Generally by building a safety cushion that will sustain you for several months in case of emergency while eliminating a good amount of stress. The strategy should include a retirement savings component that takes into account income variation over the weeks and months.

Ideally, you need to set a realistic goal so you don’t turn your automatic savings plan into a burden during leaner times. No one wants to save if it means skimping on groceries or turning down invitations from loved ones! Retirement saving needs to be for the long term. To manage fluctuating income, you can also keep a bit of that rainy day money in your chequing account… on condition, of course, that you top it up when your dry spell is over!

You also need to take the time to choose the right kinds of savings accounts with tax considerations in view. For example, for your basic tax installment needs, have a look at a high-interest savings account, so you can make withdrawals for what you owe the governments in the short term without any tax consequences.

When it comes to retirement savings, a Registered Retirement Savings Plan (RRSP) is advantageous because it lets you make deductions from the income you declare. It can be a tremendous ally for self-employed workers who, without an employer, have to put aside enough money to retire on their own.

The Tax-Free Savings Account (TFSA) is also something to look at because amounts deposited inside grow free of tax. It can be particularly interesting when you start out on your own and when your income is still low enough so you are in low tax bracket. This strategy lets you save while preserving your contribution room in your RRSP for later, when you have a higher income. And because you can make withdrawals from a TFSA at any time, it’s also great for financing projects you may have in the short to medium term.

The big advantage to starting to put aside money early is that you will benefit from the potential returns on your investments. First and foremost that includes compound interest, which is the interest on the capital plus the interest of your initial investment. It can really add up! This is also why it can be beneficial to automate your savings as soon as possible, starting with a small contribution amount. By contributing regularly through automatic bank withdrawals, you ensure that you're growing your retirement savings on an ongoing basis. You can also modify your contribution amount as your financial situation changes.

03Consider government pension plans

On one hand you have your retirement savings, on the other are the government pension plans you need to look at, even if they won’t be enough to provide for your retirement on their own.

First, there’s the Quebec Pension Plan (QPP). A retired person age 65 who starts receiving a pension in 2023 is entitled to the maximum amount of $1306.57 per month. If this same retiree waits until age 70 to claim the pension, that amount goes up to $1855.33. This amount is taxable and is indexed each year to the cost of living.

A self-employed worker needs to know that, while his or her salaried counterpart pays only half of their annual QPP contribution – the other half being paid by their employer – the self-employed person needs to pay the entire amount. That’s the equivalent of 12.8% of annual income starting at $3,500 and up to $66,000 in 2023. But the good news is these amounts are included in the tax instalments you make to the government. One less thing to worry about!

On the federal level, Old Age Security is financed from general tax revenues, so you don’t have to make any direct contributions to it. You can start receiving it as of 65 years of age and it is taxable. In 2023 the monthly payment was $687.56, but less if a person did not reside in Canada as of age 18.

Even if you add up both pensions, it would be quite a challenge to truly enjoy retirement on just these income streams. Also, unlike many salaried workers, the self-employed person cannot rely on a pension fund offered by his or her employer. That’s why it’s so important to add your retirement savings and to diversify your retirement income.

04Assess your insurance needs

Thanks to their employers, many salaried workers have group insurance that covers medical, vision and dental care, in addition to disability insurance. This is obviously not the case with the self-employed.

If you have a partner covered by private insurance, you will also have to subscribe to that coverage. At least for the medication portion. If not, you will need to seek coverage under the public health insurance plan (RAMQ), with an annual premium that’s paid when you file your tax returns, the amount of which is determined by your family income. Or you can always opt for your own private insurance instead, with the premiums tax deductible.

You also need to carefully consider disability insurance. Because, as a self-employed worker, if you have an accident or illness that prevents you from working for many months or even years, how are you going to pay the bills?

You can also include these expenses and risks on your monthly budget. It’s a choice open to every self-employed worker according to his or her situation and needs.

05Plan for vacations and statutory holidays

People who’ve just joined the ranks of the self-employed are often bundles of energy and drive who work tirelessly to carve out their place in the market. But you can’t do that forever! Just like salaried workers, everyone needs a vacation to recharge their batteries, experience new things and spend time with loved ones. Yet, without an employer, you do not benefit from two weeks paid vacation every year, nor eight paid statutory holidays as per the Act respecting labour standards.

The self-employed worker therefore needs to factor in these periods with no income so he or she can enjoy some time off, while still being able to meet their financial obligations and save for retirement. That person will need to set more money aside than a salaried worker, who always has the support of an employer when it comes to building a comfortable retirement.

Finally, self-employment clearly comes with tremendous freedom, notably regarding time management and where you choose to set up shop, not to mention not having to report to a boss. But it also comes with a lot of responsibilities. Like establishing a savings strategy adapted to being self-employed, one that takes into account your objectives, needs and realities, with a financial planner. That way the odds improve of having a career after employment that’s everything you always dreamed of.