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.
