A 3-step guide to retirement plans for freelancers

Learn how to retire comfortably as a freelancer or contract worker by making the most of Canadian government pensions and retirement plans for freelancers.

Between juggling tight deadlines, managing an irregular income, and marketing your services, it's no wonder it's hard to start saving for retirement as a freelance or contract worker. Putting saving on hold, though, means you could end up missing out on money down the line. That's because retirement plans for freelancers (and everyone else, for that matter) work best when they harness the power of compound interest, and that takes time — so the sooner you begin, the better.

Here are three steps to help you get started.

1. Know your account options

Unlike many Canadians with employers, contract workers and freelancers don't have the benefit of a company pension plan. However, you do have the option to grow your retirement savings in a registered account such as a Registered Retirement Savings Plan (RRSP) or Tax-Free Savings Account (TFSA). RRSP contributions are tax-deferred, so you don't pay tax on your contributions or investment earnings until you make a withdrawal from the plan. Your RRSP contribution room is based on 18 percent of your previous year's taxable earned income (though there is an annual limit on contributions) plus your unused contribution room carried forward.

TFSA contributions come from your after-tax income, so you won't pay tax when you withdraw. For both plans, your contributions and investment earnings grow within the plan tax free!

2. Take advantage of government incentives

Freelancers and contract workers in Canada do have the opportunity to receive government pensions in the form of Old Age Security (OAS) and the Canada Pension Plan (CPP). If you're 65 years or older, you're a Canadian citizen or legal resident at the time of application, and you've lived in Canada for at least 10 years since the age of 18, you may be eligible for OAS.

As a self-employed individual, though, you'll pay both the employer and employee portions of CPP on any income you earn. How much, exactly? That's determined by the year's maximum pensionable earnings (YMPE), an income ceiling that gradually increases each year. For example, if you earned $53,900 or more during the 2018 tax year, you'd pay 9.9 percent toward the CPP — that's 4.95 percent for the employer contribution and 4.95 percent for the employee contribution.

3. Decide how much to save

Your income is often unpredictable and irregular, and unlike some of your friends and family, you can't plan ahead expecting a biweekly paycheque. When you don't have a smooth cash flow, it's easy to overlook making regular contributions to retirement savings. That's why it's smart to prioritize your retirement funds by paying yourself first: when money comes in, allocate some of it to your RRSP or TFSA first, no matter what.

How much should you save? Since your cheques will usually come in different amounts, it's easier to save a percentage of every freelance payment you receive. The percentage you choose to save depends on what your needs will be in retirement and what it will take to cover those costs. So, consider your total family income, age, time to retirement, and any other retirement income sources you can rely on, such as rental income or a spouse's company pension.

A good rule of thumb is to start with a minimum of 10 percent of your gross income, or up to 18 percent to maximize your RRSP contributions. If you receive a cheque for $600, immediately move $60 to a savings account. Let that money sit until it's grown to $500 or $1000, then make the contribution to your retirement account. Your advisor can help you set this up.

On the other hand, if you do have a steady monthly income from recurring clients, consider setting up an automatic payment directly to your retirement account. This takes advantage of what's known as "dollar cost averaging." If you hold equity investments such as stocks or equity mutual funds, you know values can fluctuate. With regular monthly contributions, some months your contribution will buy more shares of an investment (when the share value is low), and other months, your contribution will buy fewer units (when the share value is high). But, in the long run, your cost should average out. When you make one lump sum investment, you run the risk of investing on a day when stock prices are high, meaning your money won't go as far.

It's also a good idea to include some low-risk, fixed-income investments as part of the asset allocation in your freelance retirement plan. Guaranteed investment certificates (GICs) and high-interest savings accounts can be important components of a balanced portfolio, as they can help provide stability and liquidity with your savings.

Retirement plans for freelancers don't usually come with the gig, unfortunately. You'll need to search through your options yourself and talk to an advisor about your personal situation and retirement goals. But if building a great retirement without a company pension plan takes a little elbow grease, so what? If anyone's used to getting the job done themselves, it's freelancers and contract workers.


This content is for information purposes only and is not intended to provide specific financial, tax or other advice and should not be relied upon in that regard. Individuals should seek the advice of qualified professionals to ensure that any action taken with respect to this information is appropriate to their specific situation.