Why it's vital to grow wealth outside your business

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. Data from Quantum shows three in four SME owners who exited their business said it didn’t go to plan – and 61 per cent said they couldn’t get a good price, the right buyer or someone to take over the business.

What’s more, our own MLC-commissioned research1 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 contributions2.

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 lifestyle3.

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 time4.
 

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 around5.

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 206.

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 $143,0007.

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 spouse8. Super contributions are also taxed at a concessional rate of 15 per cent9, 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 a trusted 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 super10.

Whether you have a preference for property, shares, bonds or something else again, make sure you understand your risk tolerance before you get started.

  • 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.
  • 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.

Important information and disclaimer

This communication has been prepared by Bridges Financial Services Pty Ltd ABN 60 003 474 977 AFSL 240837 (‘Bridges’) trading as MLC Advice, a member of the IOOF Holdings Limited ABN 49 100 103 722 ('IOOF') group of companies (‘IOOF Group’), registered office Level 3, 30 Hickson Road, Millers Point NSW 2000, for use and distribution by representatives of MLC Advice. MLC Advice financial advisers are representatives of Bridges.

Any advice in this communication is of a general nature only and has not been tailored to your personal circumstances. Accordingly, reliance should not be placed on the information contained in this communication as the basis for making any financial investment, insurance or other decision. Please seek personal advice prior to acting on this information.

If any financial products are referred to in this communication, you should consider the relevant Product Disclosure Statement or other disclosure material before making an investment decision in relation to that financial product. Past performance is not a reliable indicator of future performance. The value of an investment may rise or fall with the changes in the market.

Information in this communication is accurate as at the date of issue. In some cases, information has been provided to us by third parties. While it is believed the information is accurate and reliable, the accuracy of that information is not guaranteed in any way. Any opinions expressed constitute our views at the time of issue and are subject to change. While care has been taken in the preparation of this communication, subject to any terms implied by law and which cannot be excluded, no liability is accepted by Bridges, IOOF or any member of the IOOF Group, their agents or employees for any loss arising from reliance on this communication.

Any tax information provided in this communication is intended as a guide only and is based on our general understanding of taxation laws. It is not intended to be a substitute for specialised taxation advice or an assessment of your liabilities, obligations or claim entitlements that arise, or could arise, under taxation law, and we recommend you consult with a registered tax agent.

Please note that any advice you receive is provided by Bridges, not IOOF or any other member of the IOOF Group. An investment with Bridges, or any other member of the IOOF Group is subject to investment risk including possible delays in repayment and loss of income and capital invested. The repayment of capital, the payment of income and any particular rate of return are not guaranteed by Bridges or any member of the IOOF Group, or any other company, unless specifically stated in a current PDS. Neither Bridges, IOOF nor any member of the IOOF Group in any way stand behind the capital value and/or performance of any investment you may make as a result of the advice you receive.