Do you work on contract or part time, or are you self-employed? If so, you face unique challenges when it comes to saving for retirement, since there's no company pension to help pad your income later in life. In the long run, it pays off to make an extra effort now – here are a few ways to do just that.
• Contribute to a registered retirement savings plan (RRSP): An RRSP reduces the amount of income tax you pay, and any money you sock away will benefit from years of tax-deferred compounded growth. Start early and contribute regularly – even modest contributions can build into a significant nest egg. Contribute $500 a year for 40 years and you'll save $77,381. But if you double your contribution and save $1,000 a year for just 20 years, you'll have only $36,786 (based on a six per cent rate of return).
• Pay it forward: If you're not on a regular payroll (that is, you're a freelancer, contractor, occasional or seasonal worker, part-time employee without benefits or are self-employed) your income probably fluctuates from year to year. You can carry forward your RRSP tax deduction and claim it during a higher-income year to get a better return. "If the first two years were really lean for your company, but you still put money in your RRSP, you can claim those tax deductions in the third year when you start making better money," says Judith Cane, a fee-for-service financial adviser with Antara Financial Group in Ottawa.
• Set up a tax-free savings account (TFSA): Lower-wage earners are at a disadvantage in terms of RRSP investments, since the limit is 18 per cent of earnings. So if you make $15,000 a year, you can only save a maximum of $2,700 and your tax savings would be $600. Figure out your tax savings. A TFSA allows you to set aside another $5,000 a year.
• Count on Canada Pension Plan (CPP) and Old Age Security: Canada Pension Plan contributions are based on your salary and benefits are determined by how much and how long you've contributed. Some parts of your contributory period can be dropped out of the calculation, such as periods when you stopped working. The maximum monthly benefit is currently $934. The maximum Old Age Security benefit is $521 a month.
• Watch your deductions: If you're self-employed, they can affect your retirement income. "The more you deduct off your income, the less you can contribute to RRSPs and CPP," says Cane.
• Relax – you may need less than you think: "The banks like to scare us and say everybody needs $1 million in their RRSP to retire, but if you are living a frugal lifestyle now, you probably aren't going to change that in the future," says Sheila Walkington, co-founder of Money Coaches Canada in Vancouver.
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Anne Bokma is a self-employed writer and editor who writes frequently on financial issues. She socks away money every year in her RRSP but hopes to keep writing well into old age.