The most common question artists ask me at parties, industry events or just over coffee is, “How do I save for retirement without a proper pension from work?”
The hardest part is figuring out where to start. Government pensions won’t cut it except in the leanest of retirement plans, and many artists don’t own (or want to own) real estate. I get it – I’ve been there myself.
Before becoming an advisor and opening my practice, I was a singer and an actor. In fact, my first forays into the world of personal finance – that would eventually culminate into my career – was a lot of trial and error and knowing that as an artist, I had to do this myself. Nobody was going to do it for me.
The first core principle I believe all artists must live by is to pay yourself first. Think of it like building your own pension; just like traditional jobs with traditional pensions, savings are deducted from pay before we get to use it, making us far more likely to save for our future. So once a commission cheque, performance fee or lesson fee hits your bank account, first remit any applicable income taxes and HST (into a separate account just for that), then take out your “pension” before moving to fixed expenses, variable expenses, etc. But how much should you save?
The first core principle I believe all artists must live by is to pay yourself first.
Malcolm
I’m a big fan of saving a percentage of your earnings. When I was performing, I would go through the traditional “boom and bust” cycle many artists experience. Every Christmas, I could depend on increased singing gigs, as well as busier work at my joe job, but come spring, that would usually reverse into lean months. If you’re saving 10 per cent, 15 per cent or whatever per cent makes sense for your plan, you’ll save more when you make more and you won’t feel as squeezed when the normal down periods come.
Now that we’ve hammered out a plan to pay ourselves a percentage of our earnings first, the question to answer is, “What do I do with my savings?”
In Canada, our best vehicles for retirement savings are the Registered Retirement Savings Plan (or RRSP) and the Tax-Free Savings Account (or TFSA). Both have some crucial similarities; both have limits to the amounts that can be contributed; and both allow money to grow tax-sheltered while inside the account. But they have one key difference: the RRSP works as a tax deferral account and the TFSA does not.
What do I mean by “deferral”? Well, the RRSP works by subtracting your contributions from your income in the year you make them, lowering your taxes today. However, once those contributions (and any growth made on top of them) are withdrawn, that amount is added back to your taxes in that year – dollar for dollar. The idea here is that the average person has a lower taxable income in retirement than they do while working… but we artists aren’t average. Many assumptions about lifestyle come into that rule of thumb: owning a home that is paid off by retirement is a big one; ceasing all work in retirement is another.
So if you’re expecting to have a higher income in retirement than you do today (perhaps you’re an emerging artist, maybe you wish to rent rather than buy or perhaps you don’t expect to stop working at the traditional 65), then the RRSP might not be the best option for you, but the TFSA could.
The TFSA works almost in reverse to an RRSP: no tax break or lowering of income today, but all withdrawals are made completely tax-free.
OK, we’ve set our savings plan, and we’ve looked at the RRSP and TFSA to see which is best for us. We’re all set, right? Not so fast. Simply depositing funds into an RRSP or TFSA is not enough. An RRSP or TFSA is just a type of account, like a label on a container that tells the CRA how to treat the contents for tax purposes. So what should we fill that container with? That’s where investments come in.
Investment is a term that anyone can throw on any snake oil, get-rich-quick scheme or downright scam, so it’s crucial to talk with a trusted, professionally licensed advisor before making any purchase. They will be able to help you evaluate your personal risk tolerance (i.e. your ability to stomach downturns in the market) and risk capacity (i.e. how equipped you are to weather those downturns) and suggest an appropriate strategy that’s right for you.
Regardless of your particular investment strategy, if you remember nothing else from this article, remember this: the best way to grow wealth is to have a plan and stick to it.
Markets go up, markets go down. This is the natural way of things, and you must structure your financial plan to allow your pension to do its thing and grow over time. Many investors will get scared at the first hint of a downturn, and you must trust your plan and have the resolve to know this will pass.
If you remember nothing else from this article, remember this: the best way to grow wealth is to have a plan and stick to it.
Malcolm
Saving for retirement can be a confusing place to start for anyone, but for an independent artist, it’s doubly so. Still, we don’t need to have access to a workplace pension to save, invest and have a successful future. All it takes is a little learning, a lot of planning and getting the right team of professionals to help you.
Adam Malcolm is a consultant with Investors Group Financial Services Inc.
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This is a general source of information only. It is not intended to provide personalized tax, legal or investment advice and is not intended as a solicitation to purchase securities. Adam Malcolm is solely responsible for its content. For more information on this topic or any other financial matter, please contact an IG Wealth Management consultant. Trademarks, including IG Wealth Management, are owned by IGM Financial Inc. and licensed to its subsidiary corporations.
This article was published with the support of finance sponsor Adam Malcolm.
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