Keep retirement in the back of your financial mind
As an entrepreneur, you’re likely more focused on the day-to-day tasks that are involved in keeping your business running smoothly. You may not have yet considered retirement, even if it isn’t that far in the future.
Some working Canadians are registered in a company pension, or their employer matches their contribution to help fund their retirement, luxuries that you as a small business owner don’t have. It’s up to you to plan ahead and determine how you will afford to retire.
The Old Age Security (OAS) and Canada Pension Plan (CPP) are available to almost all Canadians and can help provide a modest level of income.
OAS is the simpler of the two, having nothing to do with how much you’ve worked in your lifetime, your earnings, or how much tax you have paid. It’s merely based on residency. If you have resided in Canada for 40 years, are between the ages of 18 and 65, you are eligible for OAS. It’s funded from general revenue (taxes) and can be collected beginning at age 65.
The amount of CPP you will receive in retirement is based on contributions to the plan. In Canada, everyone between the ages of 18 and 70, with an income greater than $3,500 is required to contribute to the CPP.
Regular workers contribute 4.95% of their annual wages above $3,500, to a maximum of $2,593.80. Their employer may contribute an equal amount.
If you are self-employed, you are required for both employee and employer amounts, meaning you’d be contributing almost 10% of net income up to an annual maximum of $5,187.60. This contribution is based on the net income of your business.
You do receive a tax deduction for the employer portion of your contribution, in addition to a 15% federal tax credit for the employee half. It’s important to note that CPP benefits are available starting from age 60 to 70. To learn more, check out this guide here.
Throughout your working life, the Registered Retirement Savings Plan (RRSP) and Tax-Free Saving Accounts (TFSA) offer you a tax-advantaged solution to save money for retirement. Planning ahead is a good idea, and building up your RRSP and TFSA are smart ways to plan for your (potentially pension-less) retirement.
How you plan to fund your retirement involves a lot of big decisions and many big questions, none in which you should be alone in deciding. Be sure to seek out some expert advice about how you diversify your sources of retirement income. People that will have valid input include:
- Financial advisors
- Your spouse and other family members