Brendan Charters admits that, when he and business partner Jim Cunningham started their renovation and home building company, Eurodale Developments, thinking about retirement wasn't foremost on their minds.
"We started Eurodale in 2003 and we didn't have a formalized plan," says Mr. Charters, 34. "We were more concerned about getting our first projects and making the business viable and putting our energy into that."
That's the case for many small business owners, says Lee Helkie of Helkie Financial & Insurance Services Inc., a Toronto financial adviser and member of Advocis (the Financial Advisors Association of Canada).
Typically, she says, the first 10 years of a small business' life is all about building the business and "it's very difficult to get someone to even consider another asset class. They are borrowing and it's hard for them to take money away they could be putting into the business."
But it's vital that entrepreneurs, like an increasing number of Canadians who are without defined pension plans, save for their retirement, she says.
Before he started Eurodale, Mr. Charters had worked as an account representative with a major insurance and benefits provider, so he knew that it was important to plan for the future. As his business became established, he contacted Ms. Helkie for advice. "In my previous job, I got a great education on pensions and insurance, and saw very clearly what happens when you have them and when you don't," Mr. Charters says.
He started investing in RRSPs, life insurance, land and corporate class investments (a group of mutual funds structured as a corporation).
"One of the best things small-business owners can do is to diversify and hold assets outside of the business," says Ms. Helkie. "That can mean any number of things, such as RRSPs and TFSAs (tax free savings accounts), but it's not always easy for them to do. As we've seen in the last five to 10 years, it's not good to put all of your eggs in one basket."
When a company is in growth mode it's a good time to consult a financial adviser and map out a plan, she suggests. "It helps you step back and see the broader picture, especially if you still have a tendency to put everything into the business."
Another entrepreneur, Patrick Lyver, 33, invested everything he had into his company but always made sure to add to his RRSPs.
"I had a goal," says Mr. Lyver, who is CEO of Kleurvision Inc., a graphic design, marketing and communications company he founded in 2004 in Port Perry, Ont. "I knew that I was going to borrow against it for the Home Buyers' Plan [a federal government program that allows home buyers to borrow from their RRSP to buy a home], so I wanted to make sure that I was able to maximize that."
RRSPs are the "gold standard" for saving for retirement, Ms. Helkie says, but the TFSA is also a great place to build assets. "You don't get the same tax break going in, and small business owners are very tax-conscious. But you'll solve the tax issues in retirement by having a pot of money that is tax-free."
"One thing foolishly we haven't jumped on yet is the TFSA," says Mr. Charters. "It's a great way to income-split, and it has tax-free yields, but old habits die hard."
Canadians can contribute up to a maximum of $5,500 to a TFSA annually and the cash can be withdrawn any time without penalty. One drawback is that entrepreneurs could be tempted to take money out and use it for their business instead of letting it grow for retirement, Mrs. Helkie says.
She says it's not always easy for entrepreneurs to see the value in starting to save for retirement. "Entrepreneurs are very optimistic people and it's difficult to say to them, 'Ten years from now, it may not look the way you think it will.'"
Mr. Lyver, of Kleurvision, says he listened to his parents, who are also entrepreneurs, and started saving before he began university. He started buying RRSPs when he was 20. "With my parents, it wasn't a discussion so much about retirement, but more about building personal wealth," Mr. Lyver recalls. "They told me, 'If you put $100 a month away, you won't realize you are missing it, then look at it 10 years later and you'll be surprised.' They said, 'You're only able to work so much and you'll want to have wealth in the future.'"
Mr. Lyver is balancing his investment in his firm with monthly contributions to RRSPs, a TFSA and to his son's registered education savings plan. His financial adviser helped him and his wife develop a strategic budget, allocating where their money goes each month.
"It solidified what we wanted to do, got us looking at where we want to be in five years and how we can do that. We couldn't do that without help," he says. "It's important to look at a plan, not just do what I think feels right. You need strategy and knowledge."
Entrepreneurs often hope they'll be able to sell their business and use the proceeds to help fund their retirement, Ms. Helkie says, but that is risky. "The case may be that it's not worth as much as you think at retirement, so having something else is a good idea."
Mr. Charters says that, as the renovating and building industry is "feast or famine," his investments outside his business provide a contingency fund if the building industry hits a slump. They also provide peace of mind about his exit strategy.
Mr. Lyver also hopes that he'll be able to sell his firm or that perhaps his son will take over the business, but he isn't banking on that. "For the longest time, my name was so tied to Kleurvision, but what I've been working on in the last two years is to remove Kleurvision's attachment to Patrick Lyver, with the goal to eventually have a sellable business," he says. "But I'm not going to rely on that for my retirement."
"We see a lot of business owners hanging on to their business because it isn't worth what they thought it would be," notes Ms. Helkie. "If you've diversified, it gives you the freedom to walk away if the business is not going in the right direction or if you can't find suitable buyers."
"You need to have a rainy-day fund and, if you are self-employed, it has to be higher than for other people."
Tips from an expert
Lee Helkie of Helkie Financial & Insurance Services Inc., a Toronto financial adviser, offers the following:
- Diversify. Don’t have all your investments wrapped up in your business.
- If you delay saving for retirement, it’s going to cost you more, the longer you wait.
- Start investing in other assets when your company is in growth mode, if you haven’t been able to before
- Consult with a financial adviser and develop a plan for a future.
- RRSPs provide an immediate tax break, while TFSAs provide a tax-free pool of money in the future. Which one to choose, or whether to invest in a mix of both, depends on your individual situation.
- Have your financial adviser and accountant work in tandem to develop the best tax strategy and plan your investments accordingly.
- If you have 10 employees or more, consider a group RRSP, where contributors have the freedom to choose their own investments. The at-source deduction provides an instant tax rebate.
- You can consider setting up an individual pension plan, but they are complicated and must be reviewed every three years to ensure they are not underfunded.
- Don’t count on the future sale of your business to fund your retirement. It may not be worth what you anticipate it will be.