Is your business your retirement plan?
According to recent research by the Association of Superannuation Funds of Australia (ASFA), Money Management and Investment Magazine, being self-employed is good for you, but bad for your super!
Being your own boss is a dream for many, and lots of businesses started with this primary motivation – but the research tells us it might not be good for your retirement. 29.2% of self-employed Australians have NO superannuation savings according to the Australian Bureau of Statistics.
By contrast, super coverage for full-time employees is at about 96% and only 18% of self-employed had balances over $100,000 (it is generally accepted that you need > $1mil to fully fund retirement). This occurs because many business owners take income as partnership drawings, trade as a sole trader or earn income through directors’ fees and dividends. In addition to often having tight cashflow, this leads to a reduction in super contributions.
Only 24.5% of the self-employed made tax-deductible contributions according to the ATO. Many small business owners only access free cashflow after being in business for some time (for many > 10 years) as debt is repaid, the business becomes more stable and grows and then they can start to make contributions. This means they miss out on the very powerful effect of long-term compounding of returns over many years and they are also then limited as to the amounts that can be contributed, due to contribution limits.
Interestingly, this group has a far higher concentration of “non-home net worth” tied up in business assets, though total assets by age 60 are remarkably similar. This means there is a greater focus on the value of those business assets and more importantly, the focus needs to be applied to those assets as they are much harder to realise than say listed shares or investment property.
“My business is my super” is often the explanation from business owners and that might be fine – but they need to then ensure they have in place a strategy to maximise the value of the business and successfully extract that value to fund retirement.