Retiring from contracting and construction: how hard can it be?Canadian Contractor
Looking forward to greener pastures requires planning and discipline
The day is coming when the belt, boots, and hard hat are hung up for the last time. However, unlike office work where one might foresee retirement at perhaps 65 years of age, those in the trades can’t accurately predict with accuracy when that day will come. The contracting and construction industry is physically demanding. You might have some warning; creaky joints and chronic pains that seem to get worse might give you a clue. Hopefully, it won’t be an injury of some sort. Nevertheless, the Employee Benefit Research Institute in the U.S. says that 55 per cent of those who retired early from construction did so because of health or injury issues.
Tomorrow you are one day closer to retirement!
The biggest obstacle to overcome is denial. Recognizing that retirement is part of your future requires planning and discipline now. Most small business entrepreneurs and many trades-people simply don’t put a plan in action soon enough.
Here are some sobering facts from a U.S. study. Seventy five per cent of respondents between 18 and 65 years have put aside less than $100,000 for retirement. Of those approaching retirement, i.e. 45 to 64 years, only 32 per cent have saved more than $100,000 and only 11 per cent over $500,000. If you think that’s anywhere enough to fund even a moderately comfortable retirement, think again.
Canadian studies are just as scary. According to the Federation of Independent Businesses, more than 75 per cent of business owners don’t have retirement plan in place; 42 per cent of those are already over the age of 40!
Develop a savings plan, then an investment plan
Experts have long suggested that you ‘pay yourself first’ by putting 10 per cent each year into some form of retirement savings plan. There are three basic choices; a simple investment account, a Tax Free Savings Account (TSFA), or an Registered Retirement Savings Plan (RRSP). Each have their pluses and minuses, and far be it for Canadian Contractor to start suggest which is better for you.
The point is, develop a plan and put it into action now. Remember that government pension plans like CCP/QPP start when you’re 60 years at the earliest, and OAS not until you are 65. Even so, those pensions will only be a supplement. They max out at around $15,000 per year. Being wholly dependent on CPP/QPP and OAS only assures you of a lifestyle below the poverty level.
To get a focus on your retirement, start thinking about how much income you will need. Many experts suggest that 50 to 70 per cent of your current income is required to maintain a retirement lifestyle. Mind you, if you want to continue frequenting restaurants, have expensive hobbies or toys, or see yourself taking month-long vacations at resorts, you may find that percentage insufficient.
The asset trap of owning a business
Business owners are often the worst savers. Many put everything back into their businesses, leaving their ‘savings’ trapped in an operation that may or may not have any resale value. On the other hand, those who have developed their businesses into entities might have value to a new owner have a chance for a windfall in the future. However, making a contracting business sellable requires considerable planning and strategizing too, a whole other subject. Even so, ask yourself how much you really think your business could be worth. Over a million dollars? Really? Also, no longer being a business owner means no longer being able to enjoy some of the perks you had before. Your vehicle, for example, can no longer be paid for by the company or written off as a business expense.
Business owners need to consult their accountants about optimizing their mix of salary, dividends, and retained earnings. The mix will impact how much CPP can be drawn later, as well as their personal tax situation and that of the company, both now and if it is sold in the future.
Tradespeople urgently need to plan for the future
If you are an employee of a contracting company with a pension plan, familiarize yourself with the payout benefits. Also, consider how reasonable it is to assume that you will remain with that company until the day you retire. How easily transferable are the pension benefits to another plan in the future? Experts will still suggest you save on your own. Again, think 10 per cent of your gross income. Make it an automatic monthly withdrawal so you don’t have to remind yourself or get tempted to skip a month.
Your investment strategy is as unique as your situation
Whether you are a business owner or trades-person, you’ll likely need investment advice. Shop it around with couple of different investment professionals, not just guy with a sign on his door next to the café. Talk to them and to your accountant about TFSA’s, RRSP’s, and straight investment accounts. Chances are some combination of all three might be the best. Unless you are a particularly savvy investor or stock -picker, keep your investment plan simple and consistent, use low-cost investments like ETF’s (mutual funds have high fees that gnaw at your nest-egg continuously), and consider purchasing a life annuity near retirement to give yourself a steady, worry-free income.
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