Financial Planning, Retirement Issues


Self Employed Retirement Plans

Self Employed Retirement PlansGovernment pensions help many people, but they are frankly not enough to live on and enjoy the quality of life that many of us look for in our retirement years. Individual consumers, especially those who are self employed must save additional money to live on during retirement and this is where self employed retirement plans are so important. If you are self employed you must have a personal self employed retirement plan, otherwise retirement is not going to be very pleasant.

Private pension plans can take various forms, however in Canada, they are known as Registered Retirement Savings Plans or RRSP’s and 401K’s in the US. Basically consumers make deposits with pretax dollars to these accounts with the corresponding reduction in the amount of tax they pay. It is these private self employed retirement plans that will make the difference between a poor retirement and one that is enjoyable and has the quality of life you want after you finish working for a living.

Self Employed Retirement Plans – Retirement Savings

Many people ask how much they should have in savings to last out their retirement. There are all types of answers, but if you make a couple of assumptions, you can quickly get to an answer that will work for many people. The first assumption regards how much income you can expect from your investments. This is the dividend yield or interest income from bonds and mutual funds. A reasonable yield for dividends is 4%, so let’s go with that number.

Next is how much income do you need in retirement. There are again all kinds of assumptions about needing less money when you are retired than when you are working. But the simplest and probably safest approach is that you should assume that you will live on the same amount you were making when you retired. If you use these assumptions and let’s say you made $50,000 a year when you retired, then you should hope to make the same from your government pensions and savings income.

For simplicity, let’s assume your government pension will be $10,000, then you will need $40,000 from your savings. At 4% you will need to have saved $1 million dollars by the time you retire. If you can do this, you will have no worries and you will die with a million dollars in your estate.

How Long Will You Live

Saving a million dollars before you retire is pretty tough although if you start when you first leave school and save 10% every year, it can be done, but most of us do not do that. The other thing we want to point out is that many people really do not want to leave a million to their families. They want to enjoy their lives as much as possible. This brings us to the question of how long will you live in retirement?

If you retire at age 60, many people will live into their 70’s and 80’s which can be 15 to 25 years after you retire. Taking a combination of income and principal every year from your plan will provide you with more money and you will require less money to be saved as well. The important thing is to estimate how long you will live. If your family history suggests that your relatives live to around 80, then you probably will as well, plus a couple of years.

This is where an adviser can really assist you in determining how long your money will last using some of the assumptions we have just discussed. The amount you need is less than a million using the assumptions above, however it really depends on how much you decide to take out of your plans and how fast.

Check out some of our other posts about retirement covering various subjects such as management risk, diversity, growth of your portfolio, etc.

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