Are you self-employed and feeling stressed about not having sufficient retirement savings? Plenty of business owners are still seen to be actively working years after reaching retirement age. They really love what they do or they don’t have somebody reliable to take over or they don’t want to let go of their ‘baby’ are the common reasons provided to explain this situation. Yes, these can be valid reasons or reasons contributing to the situation but for many business owners the harsh reality is that they cannot afford to go on retirement.
According to National Treasury less than 6% of South Africans can retire comfortably without having to significantly reduce their standard of living. People who are self-employed tend to have less retirement savings than their counterparts working for an employer in a more formalized, structured set-up. This is mainly due to employers’ remuneration packages placing a compulsory obligation on employees to contribute to the employers’ pension or provident fund.
While employed people will benefit from having these benefits incorporated in their remuneration packages, self-employed people are responsible to make provision for retirement themselves. When a business is still in start-up phase or not performing well financially, making provision for retirement savings often disappears from the radar or are put on hold with the intention to catch up at a later stage.
Here are a few tips and considerations for business owners to be better prepared:
- Take out a retirement annuity as soon as you start a business if you don’t already have an existing retirement annuity and start contributing towards it as soon as possible. With the time value of money principle in mind, it certainly is beneficial to make the minimum required contribution early on and increase contributions as the business is growing than to not make any contributions at all.
- Take advantage of the tax deductions where you can deduct your contributions made towards your retirement annuity up to 27.5% of the highest of either your taxable income or total remuneration, with a maximum of R350 000 per tax year. If you are not in a position to make regular monthly contributions, you can top-up your contributions anytime during the year to maximize your tax benefit.
- Don’t be tempted to use your retirement savings from your corporate job to start your business once you leave your job. Transfer your retirement savings to a preservation fund and leave it to grow gradually.
- Many businesses are dealing with the complexity that revenue is not earned on a consistent basis or the business is doing exceptionally well during certain periods and poorly during other periods. In this scenario it is advisable to put away sufficient money during the good times to also make provision for the bad times.
- When your business revenue is quite volatile (i.e. rapidly changing all the time) or not consistent from month to month, the most effective money management habit to adopt is to put away a certain percentage of any income you receive to provide for retirement contributions etc.
- The sooner you can get to a position where you pay yourself a fixed monthly salary from your business the better. The salary you are paying to yourself should ideally make provision for contributions towards a retirement annuity, medical aid, life policy, disability and dread disease policies, income protection and funeral policy. Alternatively, you can set-up these benefits within your business as your business grows and you start employing more people.
- As you get closer to retirement age start planning for life after retirement and set the business up accordingly. Do you plan on selling the business and invest the profit derive from the business to also contribute to your retirement savings? Do you have a succession plan to train somebody else to take over from you? Will you still own or partially own the business and earn income from it after retirement?
There certainly are plenty of things a business owner should pay attention to in addition to running a successful business. Remember it is not all about business, you should also take care of your personal health and financial wellbeing. You don’t want to work hard building a business for many years and then having to struggle financially during your golden years.