Biggest Bang for Your Buck! A Guide to Saving for Retirement

Saving for retirement (or any future stage of life) can be confusing for holistic practitioners. We're self employed, we have unique needs and most advisors don't understand our business. That's why we've put together this 5 minute synopsis on the basics to ensure you're not wasting your hard earned money. 

First, an overview of Canadian Pension Plan - one of the worst ways to save for retirement.  

Canadian Pension Plan (CPP) is the main way Canadians save for retirement. CPP has been around since 1966, and is designed to pay “basic” benefits package for retirees. When you’re working, you pay a certain percentage of your income to CPP. When you reach age 65, you begin receiving a certain amount of money annually. What does this have to do with me you may ask?

As an employee (very few holistic practitioners will fall into this category) you pay 5% of your earnings to CPP. Your employer pays the equivalent of another 5% for you (nice!), so a total amount of 10% of your income is contributed. Let’s keep in mind that out of your 10% contributed in your name, only 5% of that is actually taken from your income, so you’re contributing half.

As a self-employed individual – an independent contractor, for example, like most holistic practitioners – you must pay 10% of your earnings to CPP. Why? CPP contribution is mandatory for the self-employed (spoiler - unless you incorporate). Without an employer to match the 5% you contribute to CPP, you’re left on the hook for the whole 10%. Translation: you pay double the amount an employee would to get the same amount back once you turn 65 years old.

"Okay, I'm self-employed, so what’s the implication of paying the whole 10%"

We’ve done the math on this (of course!), so let’s break it down. Assuming you live to 85 years old (maybe longer with all the veggies and HIIT), the pre-inflation rate of return is only 1.10%. Translated into a language we understand: in your retirement you’ll get back your initial investment of 10% plus an additional 1%. Let me repeat – you will get the initial amount you’ve paid over the years, plus an extra 1%. Does 1% sound pitiful to you? You’re not alone in thinking yes it does. 1% growth on decades of saving is a terrible ROI (ROI = return on investment = finance speak for what you get out compared to what you put in).

I repeat - as a self-employed individual, paying 10% of your income to CPP is mandatory. So what should you do?

Incorporation to the rescue! If you incorporate your practice (reach out to us if you don’t know what this means), you don’t have to pay 10% of your income to CPP. You can pocket that 10% you would have paid, let it grow in investments or savings, or re-invest it into your business to scale your practice and expand your reach even more. In the end you’ll likely get back MUCH MORE than you would if you paid into CPP all those years.

Additionally, corporations benefit from a significantly reduced tax rate. This means that while you’re working and earning lots of money, you can leave what you don’t need in the corporation. Once you begin to slow down, work less, and eventually retire, you can withdraw that money from the corporation and pay way less tax than you would have if you weren’t incorporated. I’m talking saving tens to hundreds of thousands of dollars over the course of your career – this isn’t pocket change! 

If you want to learn more about how incorporation would impact you specifically, reach out to us on this page and we'd be happy to chat through all your options!