Retirement savings for freelancers: What you need to know

Retirement Saving for Freelancers

by Michelle Waitzman

When you’re self-employed, saving for retirement is anything but simple. There’s no employee pension, no group RRSPs, and no steady paycheque to count on. I sat down with Aldwin Chin, a financial advisor with Edward Jones in Toronto, to get his insights on how to save for retirement as a freelancer. This is a very general overview, but you can use the links at the end of the article to find more information.

How much of my income should I be saving?

You need to prioritize your money to figure out how much you can and should save. Most freelancers should allocate their income like this:

  1. Pay for your current living and business expenses.
  2. Save three to six months’ living expenses in case of emergency or lack of work.
  3. Anything that’s left should go into long-term savings and investments for retirement or for other major expenses.

How much will I get from the government when I retire? Is it enough to live on?

The government will provide regular payments after you turn 65, but they aren’t high. The main ones are Old Age Security (OAS), Canada Pension Plan (CPP), and the Guaranteed Income Supplement (GIS).

OAS payments are currently $583.74 per month, but if you have a high income (for 2017, $74,788 or higher) the government will pay you less. If you make over $121,279 you will not receive any OAS. Delaying your OAS payments until you are up to 70 years old will result in higher monthly payments.

CPP payments are based on contributions during your working years. As a freelancer, you are responsible for making sure you contribute to CPP when you pay your taxes. While most people start receiving their CPP payments at age 65, you can begin as late as 70 or as early as 60. Your payments will be higher or lower depending on the start date you choose.

GIS is an additional payment for OAS recipients with low incomes (for single people making under $17,689; or couples with a combined income under $23,377). It can add up to $871.86 per month to your OAS payments, but there are different levels depending on your circumstances. Even with this additional income, it can be difficult to get by on government pensions alone.

Should I Use an RRSP for Retirement Savings?

Registered Retirement Savings Plans (RRSPs) are one way to defer paying tax on your savings until you retire. The money you pay into your RRSP is deducted from your income for the year, up to a limit of 18 per cent of your income. In theory, this means not paying the tax on your savings while you are in a higher tax bracket (while you are working) and instead paying the tax on it when you are retired and withdraw the money (when you’re likely to be in a lower tax bracket). If you don’t put the maximum allowed amount into your RRSP one year, the unused amount can be carried over each year until you use it.

RRSPs are most valuable to freelancers in a moderate or high tax bracket. However, if you’re already paying the lowest rate of tax, or if you expect to be in the same tax bracket or a higher one when you retire, there’s little advantage to saving your money in an RRSP.

You can also use an RRSP to save for your first home. In most cases, if you withdraw money from your RRSP to help pay for your first home, you can take it out tax-free as long as you pay it back into your RRSP over the next 15 years.

How is a TFSA different from an RRSP? Which should I use?

A tax-free savings account (TFSA) works differently than an RRSP, but it also helps you to pay less tax. The money is not deducted from your income when you put it into a TFSA, but you are not taxed on any interest or increase in value from your savings or investments, even when you take them out of the account. There is a $5,500 per year limit on TFSA contributions which carries over from year to year like the RRSP limit. If you’ve never contributed before, your TFSA limit is $52,000 this year.

For freelancers who are in a low tax bracket, a TFSA may be a good savings option. However, because there’s no penalty for taking your money out of a TFSA, it can be tempting to use it for everyday expenses instead of leaving it for your retirement.

My income goes up and down. How do I make sure I’m saving enough?

This is a tough situation for freelancers and one that many face. The steps listed above are important. Basic living expenses should be your first concern, followed by three to six months’ living expenses for emergencies or slow periods. If you use some of those savings when work is scarce, replace them as soon as possible.

Once those immediate needs are covered, save as much as you can when money is plentiful. Prioritize saving over spending, especially if you have lots of unused contribution room in your RRSP and TFSA. Some freelancers prefer to wait until the end of the year to decide how much they can afford to save, while others prefer setting aside a fixed percentage of every payment they receive (generally between 2 and 10 per cent).

Is it better to dip into my retirement savings if I’m short of income, or get a loan?

Did you save three to six months’ of expenses for this situation? If not, it’s time to examine your near future. If you borrow money to get you through a dry spell, but you expect that you’ll be able to pay it back within a year or two at most, then a loan might be worthwhile. It will save you the penalty of paying tax on your RRSP withdrawal.

On the other hand, if it might take a long time to pay back the money, the interest rate on a loan or line of credit can really add up (and don’t even think about relying on your credit card). Paying tax on an RRSP withdrawal may cost less in the long run, especially if you’re in a low tax bracket.

Related links

Retirement Planning Calculator (University of Calgary SPP)

OAS & GIS (Government of Canada)

CPP (Government of Canada)

RRSP (Government of Canada)

TFSA (Government of Canada)

Financial Planning (Ontario Securities Commission)

Note: Everyone’s financial situation is unique. This article is for general informational purposes only. Please consult your accountant or financial advisor to create a financial plan that will work for you.

Michelle Waitzman is a freelance non-fiction writer, editor, and proof reader in Toronto. Before she became a freelancer, Michelle survived careers in TV production and corporate communications, after which she ran away to live in New Zealand for seven years.

This article was copy edited by Karen Kemlo.

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