Running your own business is tough enough without worrying if its sale will fund your retirement. Here’s how to sleep easy – and live out your years comfortably.
If you’ve worked hard to build up a business over a lifetime, you’re probably looking forward to a comfortable retirement funded through the sale of your business.
Unfortunately, putting your eggs in this one basket could backfire. Studies vary but it has been estimated that only some 20 per cent of small businesses that go to market end up selling1.
What’s more, our own MLC-commissioned research2 revealed only 15 per cent of Australians believe they are “very well” or “fairly well” prepared for retirement. And, because many owners pour their heart and soul into their business, they often neglect their personal wealth. According to MYOB, one in four small business owners do not make any super contributions3.
But that doesn’t have to mean your hard work may be for nothing – by focusing on wealth creation outside your business, you can build a reliable nest egg to help you retire in comfort, and, most importantly, on your terms. Use these four criteria to start thinking about wealth creation outside of your business.
1. Researching and goal-setting
A key part of your wealth creation plan is identifying your long-term retirement goals.
Start by asking yourself when you want to retire and how you wish to spend your time. Do you want an annual overseas holiday? Is eating out regularly important to you? According to the ASFA Retirement Standard, a couple aged around 65 requires $62,828 a year for a comfortable lifestyle4.
And be ambitious. After all, retirement can last many decades, so make sure you think long and hard about what you want your life to look like once you move into the retirement phase. Remember, too, that expenditure is higher in early retirement, but then declines slowly over time5.
2. Spending and saving
It’s also important to understand how much you spend by mapping out your monthly outgoings.
The sooner you can reduce debts, such as credit cards, car loans and personal loans, the better off you will be. You can save hundreds, if not thousands each year, by shopping around for a better deal on your insurance premiums, utilities and subscriptions. A report by the St Vincent de Paul Society found households in Victoria, NSW, Queensland and South Australia, for example, were paying up to $200 a year too much for their electricity because they weren’t shopping around6.
Pay extra off your mortgage each month and review your interest rate and lender regularly to ensure you’re getting the best deal and can enter retirement debt-free. According to Money Smart calculators, by contributing an extra $450 each month on a $300,000 mortgage with a 2.34 per cent interest rate, you can pay off your debt in under 15 years instead of 207.
It’s also wise to focus on regular savings. There are multiple ways to do this, including directing a percentage of your income into a high-interest-earning savings account, paying yourself additional super, or via a mortgage offset account. Check out MLC’s Small Change, Big Savings calculator to see the long-term financial gains of simply cutting out that daily cup of coffee or weekly takeaway meal.
3. The super option
According to a report from Association of Superannuation Funds of Australia (ASFA), around 20 per cent of self-employed workers have no superannuation and their total balance approaching retirement is around half the superannuation balance of employees. For example, the average super balance for male wage and salary earners is around $283,000 in the 60 to 64 age group, while for self-employed males it is around $143,0008.
If your business is set up as a company or trust, you may be obliged to pay yourself super based on the director’s fee, salary or wage the business pays you, but even if you are a sole trader or in a partnership, one way to invest in your future is by paying yourself at least 10 per cent of your pre-tax earnings in super.
There are also considerable tax breaks and government co-contributions that come from making super contributions, if eligible. For example, you may be able to claim a tax offset if you make an eligible contribution on behalf of a low-income or non-earning spouse9. Super contributions are also taxed at a concessional rate of 15 per cent10, which is usually lower than your tax rate.
The ideal option will depend on your individual situation and goals, so it’s best to speak to your adviser.
4. Investment beyond super
Keep in mind that super is not the only way to build wealth. Property continues to be a popular investment among Australians – whether that’s the house next door or a commercial property. Meanwhile, more than one in three Australian adults invest in shares or other investments outside of super11.
Whether you have a preference for property, shares, bonds or something else again, make sure you understand your risk tolerance before you get started.
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Some SME owners may opt for defensive asset classes, such as cash and corporate or government bonds, in which you receive a return on money you lend out for a set time. Defensive assets often offer lower returns but are less volatile.
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A second class is made up of growth assets, such as shares, property securities via the stock exchange, residential property investment or even gold or infrastructure.
Whatever you choose, it’s important to diversify your investments across assets and asset classes. This not only protects you from fluctuations in the market, it may also allow you to maximise your returns.
It can get complicated though, so consider seeking expert advice. That way you can feel comfortable knowing you’ve made the right choices for your particular life stage and circumstances. Seeking professional advice allows you to sleep easy knowing your money is working hard for you – and not the other way around.
For more ideas and guidance on business succession planning, download our free workbook:
How to plan your own finances – while running a business.
1 https://www.forbes.com/sites/sageworks/2017/02/05/these-8-stats-show-why-many-business-owners-cant-sell-when-they-want-to/?sh=3c902e9f44bd
2 https://www.mlc.com.au/personal/retirement/australia-today
3 https://www.myob.com/au/about/news/2018/1-in-4-small-business-owners-not-making-super-contributions
4 https://www.superannuation.asn.au/resources/retirement-standard
5 https://grattan.edu.au/wp-content/uploads/2018/11/912-Money-in-retirement.pdf
6 https://www.abc.net.au/news/2021-02-17/australians-are-missing-out-on-500m-electricity-bill-savings/13108540
7 https://moneysmart.gov.au/home-loans/mortgage-calculator
8 https://www.superannuation.asn.au/ArticleDocuments/359/1803-Superannuation_balances_of_the_self-employed.pdf
9 https://www.ato.gov.au/individuals/income-and-deductions/offsets-and-rebates/super-related-tax-offsets
10 https://www.ato.gov.au/Individuals/Super/In-detail/Growing-your-super/Super-contributions—too-much-can-mean-extra-tax/
11 https://www.asx.com.au/documents/media/asx-australian-investor-study-2017-media-release.pdf
Important information and disclaimer
This article has been prepared by NULIS Nominees (Australia) Limited ABN 80 008 515 633 AFSL 236465 (NULIS) as trustee of the MLC Super Fund ABN 70 732 426 024. NULIS is part of the group of companies comprising Insignia Financial Ltd (formerly IOOF Holdings) ABN 49 100 103 722 and its related bodies corporate (Insignia Financial Group). The information in this article is current as at June 2022 and may be subject to change. This information may constitute general advice. The information in this article is general in nature and does not take into account your personal objectives, financial situation or needs. You should consider obtaining independent advice before making any financial decisions based on this information. You should not rely on this article to determine your personal tax obligations. Please consult a registered tax agent for this purpose. Opinions (if any) in this article constitute our judgement at the time of issue. The case study examples (if any) provided in this article have been included for illustrative purposes only and should not be relied upon for decision making. Subject to terms implied by law and which cannot be excluded, neither NULIS nor any member of the Insignia Financial Group accept responsibility for any loss or liability incurred by you in respect of any error, omission or misrepresentation in the information in this communication.
