Retirement planning for small business owners

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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 & Westpac we at least can have a ballpark figure to use as a base for retirement planning.They run a survey of retirees every 6 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)

Modest lifestyle
– single

Modest lifestyle
– couple

Comfortable lifestyle
– single

Comfortable lifestyle
– couple

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 5% every 6 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% rather than 3-5% on residential investment properties or the volatility of the share market. Click here for a link to a case study on how this strategy works in reality.

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.

 

  • http://www.facebook.com/profile.php?id=525321220 Matthew Gain

    Interesting post Liam. What sort of time period should one be planning for retirement? Obviously we don’t know when we will ultimately die, but if $55K is a comfortable salary per year, what is the goal amount you should be aiming for if you plan to retire at 65?

    • http://www.nextgenwealth.com.au Liam Shorte

      Hi Matthew

      There are a number of factors that have to be considered but here are a few:
      1. Life Expectancy – do you want funds to last beyond the average 87 for female and 83 for male?
      2. Risk Tolerance – What sort of asset allocation are your willing to accept. 50/50 FixedInterest/Shares or more or less?
      3. Any Age Pension support? The more you can achieve the less of your capital you use up.
      4. Will you need lump sums for cars, home repairs , major holidays etc
      5. The returns in the markets and inflation factors?
      6. Are the funds inside a Super Pension and taxed at Nil or outside Super and possibly subject to tax or CGT?

      I work on a bare minimum requirement of $1,000,000 to fund $55k a year to age 87 and this includes using the capital for a moderate investor but this is just an estimate. As one member of a couple is more than 75% likely to live beyond 87 I would suggest $1,250,000 as a realistic base amount which is supplmented by Centrelink as your balance drops.

      You can use a calculator to check you own needs and circumstances but remember they are only as good as the assumptions used! Here are 2 we use:

      http://www.genesysadvisers.com.au/resources/retirement/retirement.html
      https://www.moneysmart.gov.au/tools-and-resources/calculators-and-tools/retirement-planner

      Hope this helps.

      Liam
      @smsfcoach