This article covers small businesses and Super. Including case studies and suggestions to get you started!
A client who runs his own dry cleaning business came to see me last week. Barry was in a bit of a state. He told me it had suddenly dawned on him he wasn’t far off retirement and had been reading all these stories in the paper about how much a person needed to have in super for a comfortable retirement.
The final straw was when Barry started putting feelers out about selling the business he’d shed blood, sweat and tears over for so long. Buyers were only prepared to pay half what he thought it was worth.
Too busy managing his business; Barry hadn’t been paying much attention to his super. In fact, he didn’t even know how much he had before he came to see me.
Sadly, I have heard the same story so many times in recent years.
The many reasons
According to the Australian Bureau of Statistics, small business owners have the smallest superannuation balances of any sector. These are the most common answers I get when I ask why:
- I want to reinvest profits back into my business;
- I’d prefer to put my money into something I have control over;
and the most common excuse,
- I don’t believe in super.
Although these reasons sound good in theory, rarely do they help you retire in the style you have always dreamed of after years of hard work.
Take control of your retirement funding
Remember that super is just a tax structure, it’s not an investment in itself. You can still control where you put your hard-earned cash. You can own a little bit of Australia’s other successful businesses, ones far bigger than your own, at a fraction of the cost. You can park money in a term deposit or invest in property, if that’s appropriate. The key is to spread your investments.
Tax treatment is great for business owners
As a small business owner, you can claim a 100% tax deduction on what you contribute to super (up to $35,000 for the 2015/16 year if you’re over 50, $30,000 if under 50). Earnings are taxed at only 15%, and the government has also opened the door for the ‘co-contribution’ scheme to small business owners.
It’s not just for employees
You’re paying super for your employees so you need to follow suit and ‘pay yourself first’. A simple way to start is to set up an automatic debit each month or quarter, just as you do for your loyal staff.
This is what I suggested to Barry
After I’d settled Barry down, we looked at his situation. He had left it a little late but it was still salvageable. He was 48 and had just $50,000 in super, built up from an earlier career. I suggested he start contributing 9.50% of his salary from now. He paid himself a salary of $80,000pa so that equated to $7,600 a year towards his super.
Based on a net return of 7% pa (a typical ‘Balanced’ fund long-term average), a projection shows that Barry could end up with approximately $357,000 at age 65. Not a bad outcome from such a small contribution and a good ‘back up’ to the eventual sale of his business.
Being able to contribute more would of course give him a better nest egg at retirement.
If your situation sounds similar to Barry’s and you would like some suggestions on how to grow your super without relying too much on your business, give me a call. We’ll help you set up a plan to achieve this, as well as provide valuable budgeting and cash flow advice.