Small Business Owners: Planning for Retirement

On the subject of retirement planning, the most typical answers among small business owners are: “I don’t intend to retire” or “my business is my retirement fund.” However, the reality is that slowing down or retiring is in the cards sometime in the future, or you will have no choice but to do so due to health reasons or shifts in your industry.

It is difficult to save for retirement when you’re paying ongoing expenses and intend to expand or finance your business operations. A few employees use a percentage of their current income to approximate their retirement income requirements. However, this is not the right method for small business owners who are building their business and waiving additional income to create long term wealth.

Your retirement fund requirement at 60.

There is a ballpark figure you can use as a base for retirement planning, courtesy of ASFA & Westpac. Every six months, they give out a survey to find out the amount retirees are spending and the things they are spending their money on. The data provides a single person or a married couple an idea of what amount they would need to live a comfortable life upon retirement.

Finances for different living standards and households as of 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 numbers in every situation assume that the retired person(s) lives in their own home, and the amounts equal to expenses by the household (for couples). The budgets can be higher than household income minus income tax where there is a drawdown throughout the extent of retirement. Figures from female respondents were used for singe calculations. Unless otherwise stated, all computations are weekly.

Follow these tips to meet your retirement fund needs:

Be responsible for your own savings.

Employees have their employers to take care of their superannuation payments. However, this is not the case for business owners who must pay their own superannuation. As a business owner, you must utilise a method of ‘paying yourself’ and start as early as possible even if the amount is only $20 per week (this is sufficient to obtain the government co-contribution) while getting minimum income from your own business. Raise the amount by 5% every six months and increase it further during the good years after you have come up with a tax plan with the help of your financial planner or accountant.

The foundation of your retirement plan will normally be a business retirement or exit plan. Don’t think that you will have to close down your business. But one aspect of your superannuation planning may involve selling your business.

According to the MGI Australian Family and Private Business 2010 conducted by RMIT University, owners are depending on the sale of their business to finance their retirement, but with prices declining and available funds running out, they are forced to continue working.

Save a portion of your profits each year because the value of your business may or may not be there. Avoid reinvesting all the profits back into your business. What you need to do is build wealth inside and outside of your business as you approach retirement.

Think about starting a self-managed superannuation fund.

A number of business owners sign up for a self managed superannuation fund (SMSF) for the retirement fund plan. You can derive many benefits from SMSF including reduced tax rates, flexibility when looking at sources of income, and ability to decide what to do about your assets. In addition, you can also own the place where you run your business in your SMSF. Capital becomes available for reinvestment, and you gain a secure tenancy with your SMSF serving as the landlord. Your retirement plan, or SMSF, gets a steady rental income, frequently at the industrial or commercial property rates of 7-10%, not the 3-5% on residential rental properties or the instability of the share market.

Control your risks.

Let’s say you find yourself considering withdrawing from your business in a time like now, following GFC where there is a financial crisis, or several business owners are divesting simultaneously. If this is so, start to plan and organise your business to sell it 5 to 7 years prior to your intended retirement age, to get the highest possible value.

Get life, disability and business expenses insurance, so that you or your loved ones can employ people to assist you in operating the business. This would ensure that the sale of the business will be well planned rather than forced.

Know that superannuation is shielded from bankruptcy.

Your superannuation balance is shielded from your creditors in case of a bankruptcy, as long as you are making payments regularly. Take note that payments have to be regular and ongoing, and not look as if their sole function is to take cover from bankruptcy.

The key is advanced planning.

Retirement planning should be done as early as possible. A large number of business owners reach a plateau at some point in their working lives, or worst, they get sick or get injured and that ends their career. People are frequently very tired or preoccupied that they lack the drive to organise and market their business for sale the right way.

This gives them so little time to sell the business for maximum value, and buyers will know this and take advantage!

Commence early and focus on the end target so that your business and retirement fund will all be arranged for you. Thus, you will not be forced to decide whether to retire or continue working.

Enlist the help of professionals when planning for your retirement. If you are a business owner, then your business should be a part of that plan.

At PJS Accountants, we offer succession planning services to help you prepare and organise your business for when you eventually retire. We also offer expertise in managing SMSF, accounting, taxation, business improvement, superannuation, business valuations, asset protection, succession planning, and bookkeeping. Contact PJS Accountants for enquiries.