Thursday, February 10, 2011

Retirement Contributions and the Self-Employed

If you are self-employed, you must still contribute to the Canada Pension Plan.  It is based on your net business income (after expenses). The contribution rate is roughly 9.9% of your pensionable earnings. Since a self-employed person is considered both the employer and the employee, he or she is responsible for making both portions of the contributions. The CPP retirement pension is a monthly benefit paid to people who have contributed to the CPP. The pension is designed to pay approximately 25 percent of the earnings on which a person's contributions were based.

For now,CPP is the only pension plan available to self-employed persons. There is some talk in the news about providing more pension options for the self-employed and business owners, but it likely won't be in the works for several years yet.

What other choices does that give a person who falls into one of those two categories?

RRSPs, TFSAs and myriad unregistered investments.

Basically, if you are self-employed or own a small business (like myself), the only person you can rely on for your retirement income is you. Or perhaps you have a spouse who has a wonderful pension plan through their employer. Otherwise, you're on your own.

Having your money in an RRSP makes sense if you will be in a lower income tax bracket after you retire, which is very likely for my situation.
Having your retirement money in a TFSA makes sense if you want to have an income without having to pay any taxes on it, but of course their is a contribution cap of $5000 per year. Seeing as I am no where near the cap, this could be good place for me to start.

I sure get why most folks get overwhelmed and scared into inaction. There is so much to consider, and if a person listens to the Spurts (as Gail loves to call them), the total amount of money you need to have amassed by your 65th birthday is inconceivable! So if you have no hope in hell of ever having the required 16 trillion dollars you need to provide you with the amount of retirement income that you would like to have, why bother trying??

Well, I think that my retirement is going to look something like this. I will not retire at 65. I will likely still work, but only reduce my hours and allot myself ample vacation time. ( In the industry where I work, older persons seems to build a better rapport with clients.) My hubby will have a pension income that will likely take care of most, if not all of our typical living expenses. We will both partake of mutual hobbies that we enjoy, and perhaps have a few new ones.  My semi-retirement income will likely cover the extras, like travelling and dining out frequently. We will have no consumer debt and will likely have bought and paid for a condo that will see us through our golden years. I'm hoping our children will still like us enough to help out when I'm having trouble walking in my old age. :)

So with my monthly $25 contributions this year, added to the $1000 I had saved up last year, perhaps these little bits will be starting me out down the right road.

As a wise woman once said, " When you fall down on your face, at least you know you were headed in the right direction. Falling on your bum means you were going the wrong way."

I know I'm going forward with my contributions. I may even make some mistakes along the way and fall on my face. But I know that I am in motion which is much better than being scared into doing nothing for my future.

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