Top 10 Retirement Strategies for Canadian Small Business Owners and Professionals

Running your own business or professional practice means you're the architect of your own retirement plan. Without an employer pension to fall back on, it's up to you to plan your future and decide how to pay for your retirement. Yet the numbers are sobering. 76% of business owners intend to exit their business, but less than 10% actually have a plan.

If you're a mid-to-late career professional, whether you're running a dental practice, law firm, accounting office, or any other business, now's the time to get serious about retirement planning. Here are ten strategies that can help secure your financial future.

1. Start Planning Early and Set Clear Goals

The first step sounds obvious, but it's where most business owners stumble. You need to decide roughly when you want to retire and how you want to live in retirement. Do you see yourself traveling six months a year? Playing golf three times a week? Starting a consulting practice?

Once you've got that vision, work backwards. Calculate what annual income you'll need to support that lifestyle. Some professionals follow the FIRE (Financial Independence, Retire Early) approach, multiplying yearly expenses by about 25 to get their target nest egg. Don't forget to factor in inflation so your savings keep up with rising costs.

Government benefits provide a base income, but usually not enough to sustain most business owners' desired lifestyle. If you've been paying yourself mostly in dividends over the years, your CPP benefits might be minimal. Take stock of what you actually have – RRSPs, TFSAs, investments, expected CPP and OAS – and identify the gap between that and your retirement goals.

2. Maximize RRSP and TFSA Contributions

Without a workplace pension, RRSPs and TFSAs become your retirement workhorses. The advice here is straightforward: use all your RRSP contribution room and maximize your TFSA contributions every single year.

RRSP contributions are tax-deductible and grow tax-deferred, while TFSA investments grow tax-free and can be withdrawn tax-free. These accounts form your baseline retirement fund outside of your business.

The trick is consistency. Set up automatic monthly contributions so you "pay yourself first," even when business cash flow gets tight. An incorporated consultant might auto-deposit 10% of each client payment into a TFSA – it's not glamorous, but it works.

Don't overlook spousal RRSPs either. If your spouse is in a lower tax bracket, contributing to a spousal RRSP can lead to significant tax savings in retirement by balancing incomes between you and your partner. This strategy works particularly well for professionals whose spouses may have taken time off for family or work in lower-paying roles.

3. Consider an Individual Pension Plan (IPP) for Your Corporation

Here's a powerful tool that many incorporated professionals don't know about: the Individual Pension Plan. It's essentially a defined-benefit pension plan that your corporation sets up just for you.

Good candidates for IPPs include incorporated business owners or professionals aged 40-71 with annual salaries around $100,000 or more. The beauty of an IPP? The allowable contributions often exceed RRSP maximums, especially as you get older.

Let's say you're a 50-year-old incorporated dentist drawing a $150,000 salary. An IPP could let you contribute significantly more per year than regular RRSP limits allow. Those contributions are tax-deductible to your company and grow tax-deferred, rapidly building your pension fund in those crucial final years before retirement.

4. Pay Yourself Strategically: Salary vs. Dividends

How you take money out of your business has huge retirement implications. Salaries create RRSP room and CPP contributions, while dividends don't. Paying yourself a salary means you're contributing to CPP and accumulating RRSP contribution room. Effectively forcing some retirement savings.

Many owner-operators use a balanced approach. They might pay themselves a modest salary up to the CPP maximum (about $71,300 in 2024) to secure future CPP benefits and RRSP room, then take additional profits as dividends for tax efficiency.

Remember, if you've only ever paid yourself dividends, you won't get CPP retirement benefits for those years. Some professionals intentionally skip CPP, preferring to invest what would have been contributions themselves. 

5. Diversify Your Investments Beyond the Business

Too many business owners pour every spare dollar back into their company. While believing in your business is great, it shouldn't be your only retirement plan. Building investments outside your business that eventually generate enough income to cover your living expenses reduces your risk dramatically.

Take a portion of your business profits and invest them in stocks, bonds, index funds, real estate, or other income-producing assets. An orthodontist might invest one day's clinic earnings per week into a diversified portfolio. After 20 years, those investments could produce steady income independent of the practice.

6. Have a Succession Plan for Your Business

Every business owner will eventually exit their business. The question is how, and whether it'll fund your retirement the way you hope.

Your options include transferring or selling to a family member, selling to a business partner or key employee, or selling to an outside buyer. Each path requires years of preparation.

If you want a family member or junior partner to take over, start involving them now. They may need several years to gain the skills and relationships and learn every part of the business. If you're planning to sell to a third party, focus on making your business attractive to buyers. Solid recurring revenues, documented processes, and a strong management team increase value.

7. Plan for a Tax-Efficient Business Sale

Many entrepreneurs assume they'll sell their business to fund retirement, but it's rarely that simple. Get a professional valuation of your company well before retirement so you have realistic expectations and time to boost value if needed.

Here's where Canada offers a huge advantage: the Lifetime Capital Gains Exemption (LCGE). The LCGE could spare you from paying tax on all or part of the profit you earn from selling your business. As of 2024, the lifetime exemption for small business shares is $1.25 million.

If you sell your company for a $1.5 million gain, the LCGE could allow roughly the first $1.25 million to be tax-free, drastically increasing your retirement funds.

But there's a catch. Your business needs to meet certain tests, including being a Qualified Small Business Corporation with most assets in active business use for at least 24 months. This isn't something to address last minute. If you have surplus cash or investments in the company, you may need to "purify" assets years ahead to qualify.

8. Transition Gradually with a Phased Retirement

You don't have to go from 60-hour weeks to zero overnight. Many business owners choose a slow burn retirement. Winding down in stages rather than one abrupt stop.

A 60-year-old chiropractor might reduce clinic days from five to three per week. A consulting engineer might take fewer projects and longer vacations. Over regular intervals, reduce your work hours or client load and gradually shift toward retirement.

This approach generates ongoing income while freeing up personal time. It also helps with the psychological transition: entrepreneurs often struggle with suddenly having no business to run. 

9. Make Your Business an Ongoing Income Stream

Transition from owner-operator to just owner. If you've built a solid business, you may hire a manager to run daily operations while you maintain ownership – then live off the profits as your retirement income.

To make this work, you need to institutionalize your knowledge and delegate effectively. Put standard operating procedures in writing. Train key employees, and create a structure where decisions aren't bottlenecked with you.

The benefit? You retain an income stream and can potentially sell the business later on your terms. 

10. Prepare for Life After Retirement

Retirement isn't just a financial event. It's a major life transition. Especially for driven professionals, leaving the business can create a void. Plan for how you'll find purpose and stay active. Maybe you'll volunteer, teach, start a hobby venture, or spend more time with family.

Many ex-business owners take on consulting gigs or board positions after retirement for supplemental income and intellectual stimulation. 

Don't forget the practical side. Ensure you have updated wills and estate plans that reflect the fate of your business and assets. Consider life insurance or estate freezes if you're passing the business to children. With your legacy secured, you can fully enjoy retirement.

The only thing that matters is that you have the money and health to cover your desired lifestyle; everything else is just details. With thoughtful planning using these strategies, you'll be well positioned for a comfortable retirement on your own terms.

Don't leave your retirement to chance. Let the experts at Surcon Mahoney Wealth Management help you implement these strategies with a customized plan for your unique business situation. Book your consultation today to discover how our expertise with professionals and business owners can secure your financial future.