For self-employed clients, retirement planning brings many challenges. These clients often lack a steady salary and employee benefits. And, says Laurie Stephenson, financial planner and owner of Starboard Wealth Planners in Halifax: “[Entrepreneurs] are so busy working in their business, they don’t work on their business.”
Helping small-business owners understand the need for retirement planning and persuading them to invest the time in that planning is a critical first step toward helping these clients create a secure retirement.
“Show them the various risks that are out there and help them walk through the maze of options,” says David Gorveatte, certified financial planner with Investia Financial Services Inc. in Fredericton. “You have to build a plan that works for [these clients] and allows them to feel good about their future.”
Charles Ghadban, president of Charles Ghadban Accounting in Ottawa, notes that the lack of a defined-benefit (DB) pension plan (or even a defined-contribution plan) and the absence of a regular paycheque from which to build a nest egg consistently are the major challenges facing business owners in their retirement planning.
“The self-employed are forced to not only overcome the day-to-day challenges they face,” Ghadban says, “but they also must earn enough income to be able to set aside funds for their retirement.”
New tax requirements pose additional challenges for small-business owners. The federal government made changes to the rules surrounding passive income that restrict access to the small-business deduction for many companies.
Given these challenges, the first step is to set aside money whenever possible. Says Ghadban: “One of the most important strategies that we help our clients with is to implement pricing models that include paying themselves – meaning they do not live off the profits of the business; rather, they draw a salary, wage or dividend, following the strategy to ‘pay yourself first’.”
The type of payment varies, depending on your client’s stage in life.
“For younger self-employed clients,” says Jennifer Rideout, wealth advisor with Assante Capital Management Ltd. in Halifax, “my goal is to start them saving funds outside their business to help build and protect their retirement plans in case their business doesn’t succeed. For [older] clients who didn’t set aside funds outside their business, I consider strategies that are not tied to the investment market, as these clients cannot take on this risk.”
Permanent life insurance, which provides lifelong protection and the ability to accumulate cash value on a tax-deferred basis, is another tool that is tax-efficient, Stephenson says.
Peter Merrick, certified financial planner and co-founder of TheIceSolution.com in Toronto, suggests an individual pension plan (IPP) may be advantageous. An IPP is a type of DB pension plan set up and funded by a client’s corporation. Contributions by the corporation are tax-deductible for the business and not treated as a taxable benefit to the client. The money is taxed as income in the hands of the client only when withdrawals are made. Contribution limits are higher than those of RRSPs.
Also attractive, Merrick says, are retirement compensation arrangements (RCAs), another tax-efficient way for a client’s company to fund his or her retirement. Again, payments made by the company into the plan are tax-deductible for the business; the client pays no personal taxes on the contributions until benefits are paid to the client after retirement.
Clients also may consider corporately owned critical illness insurance, which can be used to help offset the risk of a serious illness and protect retirement assets.
For entrepreneurs, retirement planning often involves succession planning. Once a successor is chosen, he or she must be involved in the business for years before the business owner retires so customers will be comfortable with the transition, says Gorveatte, who is in the first year of his own 10-year business transition.
Successful retirement planning for business owners depends on knowing your client, Stephenson says: “You must have a solid discovery or fact-finding [process] and help clients set up an appropriate retirement plan. If you don’t have a thorough understanding, you’re not going to be able to help to the extent they need.”