Mapping out sources of savings and income into retirement is critical for small business owners when retirement planning (Getty Images/Thomas Barwick)
Retirement planning is a work-in-progress for everyone, even CPAs who have the advantage of their training and career-gained knowledge. Savings goals and strategies will shift dependent upon age, stage in life and saving ability.
The decision about when to retire is clearly top of mind, with one-third of Canadians saying they plan to change their target retirement date due to the pandemic, according to a recent RBC insurance survey.
As a small business owner—or in the case of many CPAs, one with an accounting practice—there are strategies that, over time, can fortify a retirement savings plan.
DIVERSIFY YOUR SAVINGS VEHICLES
Putting all your eggs in one basket—that being all money going into your business or assuming the value of your business will fund retirement—may be a strategy when the doors first open to help ramp up activity, but it isn’t the best option for the long-term, says Debbie Gorsline, FCPA, partner of Calgary-based, Anderson Gorsline Chartered Professional Accountant.
“You should be prepared to transition if something unexpected happened to you or your business, weigh your risks over time and focus on capital preservation,” she says.
Working with a financial planner to guide her decisions, Gorsline expanded her retirement savings strategy to include a Tax-Free Savings Account (TFSA)—which also acts an emergency fund—and Registered Retirement Savings Plan (RRSP) to tap into down the line. Risk assessment should also be a part of the strategy, she adds. Where the business or practice is held in a corporation, additional planning will be needed, such as paying yourself a salary so that you have a source of earned income so that RRSP contributions can be made or determining whether investing at the corporate level makes sense.
Kurt Rosentreter, CPA and portfolio manager with Manulife Securities Inc., also believes that relying on one path to fund your retirement is dangerous, leaving you with few options but working the rest of your life, banking on the one-time sale of your business or perhaps real estate you own (hopefully mortgage free) to coast you through.
“Make sure that you’re diversifying your savings into other things that will grow,” he says. “I’ve had clients who are effectively trapped because they didn’t do that.”
MAP OUT SECURE SOURCES OF RETIREMENT SAVINGS AND INCOME
According to the RBC Insurance survey, the impact of inflation on savings, expenses and purchasing power has 78 per cent of Canadians concerned. They are also worried about outliving savings (48 per cent) and about having access to a guaranteed income (47 per cent).
Yet, establishing secure sources of savings and income (now and into the future) is one of the first steps for building a retirement plan, says Rosentreter. “Your income from the business will change over time and the money funding your spending will also change,” he says.
It may seem obvious, but it’s important to go through the exercise of figuring out what you have and what you’ll need in retirement. Establish your starting point by summarizing your current net worth analyzing historical savings habits, investment returns and assets versus liabilities, suggests Rosentreter. Then project when your income from the business will stop and what income or savings sources will replace it. Then weigh these sources against projected living costs, less taxes, dependent on stage in life.
For example, he notes, strategize your retirement around when and how you will access (where applicable) Canadian Pension Plan (CPP), Old Age Security (OAS), RRSPs, TFSAs, annuities, investments held in a corporation or other investments (real estate, for example)—dependent on what is accessible to you. Weigh the same factors for a spouse or partner, if applicable, and combine them. One key issue to consider is how to factor in the value of your business as a source of retirement funds. The concern is risk—if you are counting on the value of the business from a sale or transition and that doesn’t materialize, will you be able to retire when you want to?
“It’s a high-level mapping of different income sources to create a retirement cashflow forecast, starting now until age 100,” explains Rosentreter.
REVIEW CONSIDERATIONS FOR INCORPORATED BUSINESSES
Incorporating a business is one beneficial option for retirement planning specifically because of the tax deferral benefit, which allows business earnings to be retained in the corporation after corporate income tax. The business is subject to a lower tax rate (between approximately nine per cent and 13 per cent depending on the province) on the first $500,000 of taxable income, with the remaining tax deferred until dividends are paid out to shareholders. It should be noted that the threshold for the small business rate federally and for provinces other than Ontario and New Brunswick will be reduced if passive income earned in the prior year exceeds $50,000 (and eliminated once passive income exceeds $150,000). Once these passive income thresholds become an issue, you can switch to other savings methods, such as making RRSP contributions.
“By deferring the tax, you have more money working for you within the corporation,” says CPA Aurèle Courcelles, assistant vice-president of tax and estate planning at IG Wealth Management. “The longer you can benefit from the deferral the better. When you get to retirement, you’ll have a bigger pool of money to draw from.”
If you believe that the shares of the business corporation can be sold in the future for a gain that is eligible for the capital gains exemption, then the accumulation of passive investments at the corporate level must be carefully considered as that may impact eligibility.
Finally, if funds are being invested at the corporate level, consideration should be given to whether the use of a holding company makes sense. If the holding company owns shares of the corporation running the business, it may be possible to pay regular dividends to the holding company and invest the funds there. This helps protect investments from any future business risks that may arise.
If your business is large enough, you have incorporated and you have or will pay yourself an annual salary from your corporation, you may also want to consider an Individual Pension Plan (IPP) to build retirement savings.
IPPs allow the corporation to make larger contributions over time (when compared with the use of an RRSP), providing a bigger pool of money when withdrawing income in retirement. However, there are downsides such as higher fees and potential investment restrictions when compared with other savings options.
Lastly, consider a gradual exit from the business (by working part-time or being paid through dividends as a passive owner), rather than selling the business outright to a third-party. For Gorsline, this is a personal decision that takes careful consideration over time for every business owner.
“I’m slowly starting to think about the best way to do this. My business partner and I have not 100 per cent settled on that,” says Gorsline. “I know I don’t want to be working the same way at 61 that I am at 54. That’s one of the major benefits of being your own boss, you can transition into your retirement.”