Retirement planning for small business owners
When talking about retirement planning, “my business is my retirement fund” or “I don’t plan to retire” are both common responses among small business owners. However, the fact is that you are likely to decide to pull the pin at some future date or will be forced to do so because of health conditions or changes to your industry.
Saving for retirement is tough when you have ongoing costs and plans for expanding or funding your business activity. Some workers estimate their retirement income needs using a percentage of existing income, but this does not work for a small business person building a business and foregoing extra income to build long term wealth.
How much do you need to retire at 60?
Thanks to ASFA and Westpac we at least can have a ballpark figure to use as a base for retirement planning. They run a survey of retirees every six months to quantify clearly how much money retirees are spending and what they are spending it on. This provides us with a free resource that shows how much a single person or married couple needs to budget for a simple or comfortable lifestyle in retirement.
Budgets for various households and living standards (June quarter 2015)
|Total per week||$455||$654||$824||$1130|
|Total per year||$23,662||$34,051||$42,861||$58,784|
Source: ASFA Retirement Standard
The figures in each case assume that the retiree(s) own their own home, and the amounts total expenditure by the household (if it’s a couple). This can be greater than household income after income tax where there is a drawdown on capital over the period of retirement. Single calculations are based on female figures. All calculations are weekly, unless otherwise stated.
So now you have a target: how do you go about meeting it?
Here are some tips:
Business owners must be responsible for their own savings
Unlike employees whose employers must pay superannuation for their employees, as a business owner you are responsible for funding for your own superannuation. You need to adopt an approach of “paying yourself” as early as possible even if it is just $20 a week (enough to get the government co-contribution) while building a business on a low income. Increase this by five percent every six months, and add more in the good years after tax planning with your accountant or financial planner.
As a small business owner, your retirement plan will usually be built around a business retirement or exit plan. This does not necessarily mean the end of the business, but part of your superannuation planning may include the sale of the business.
The MGI Australian Family and Private Business Survey 2010 undertaken by RMIT University showed that “owners are relying on the sale of their business to fund retirement, and with the fall in price and drying up of available cash for funding they are deciding to keep working.”
As the value may or may not be there in your business, you should set aside some of your profits every year as you go along. Do not reinvest everything back in the business. The idea is to be building wealth both inside and outside of the business as you head towards retirement
Consider self-managed superannuation funds
When planning retirement funding, many business owners choose a self managed superannuation fund, or SMSF. SMSFs provide a number of benefits such as low tax rates, control over assets such as the ability to invest in property, and flexibility when considering income streams. Consider the double benefit of owning the business premises in your SMSF. Your business frees up capital to be used for reinvestment, and you will have the advantage of a secure tenancy with your SMSF as the landlord. The retirement plan (SMSF) benefits from having a solid rental income, often at commercial / industrial property rates that are in the region of 7-10 percent rather than three to five percent on residential investment properties or the volatility of the share market.
Manage your risks
What if you are suddenly looking to exit in a period like we are in now, post GFC where there may be a recession and/or multiple other similar business owners selling at the same time? For this reason, business owners should begin planning and organising their business for sale sell five to seven years before their targeted retirement age, to extract maximum value.
You should have life, disability and business expenses insurance in place to allow you or your loved ones to hire help to continue running the business. That way the eventual business sale will be a planned process rather than a forced sale.
Be aware that superannuation is protected from bankruptcy
Another advantage of super is that so long as you make regular contributions, the balance is protected from your creditors in bankruptcy. The key is that contributions must be regular and ongoing, and not appear as if their only purpose is to hide from bankruptcy.
Advance planning is the key
Plan your retirement in advance. Most business people reach a point in their working lives when they “hit a wall”, or worse, they suffer an illness or career-ending injury. People are often so exhausted or distracted that they don’t even have the energy to prepare and market their business for sale properly.
This means business owners are giving themselves very little time to sell the business for the best price, and buyers can smell a fire sale!
Start early and keep the end target in mind so that you will have your business and retirement nest egg prepared. Then, retiring or continuing to work will be your decision—not a necessity.