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How to Prepare for Retirement When Self-Employed

Do you wonder how self-employment affects retirement?

Australian self-employed people must plan for retirement due to their unique challenges. It would be best if you navigated a complicated retirement path, unlike traditional employees. A comfortable retirement requires early planning.

In this article, we’ll discuss the importance of proactive retirement goal setting, sustainable saving, and informed investment decisions to help self-employed and small business owners overcome their challenges and secure a financially stable retirement.

Understanding Retirement Options in Australia

As a self-employed individual in Australia, you have several retirement options available to you. 

1. Superannuation: Self-employed individuals can contribute to their own super fund, with concessional and non-concessional contributions available. 

2. Self-Managed Super Funds (SMSF): An SMSF allows members to be trustees, giving more control over investments.

3. Personal Investments: Property, shares, or managed funds, can provide additional income during retirement but come with risks.

4. Government Benefits: The Australian government offers benefits to retirees, such as the Age Pension and Commonwealth Seniors Health Card, but eligibility requires meeting age and means-tested requirements.

5. Retirement Plans for Self-Employed Individuals: According to the Australian Tax Office, self-employed individuals can contribute to various retirement savings plans. For example, you can contribute up to $25,000 in a Superannuation retirement account.

To make the most of these opportunities, you should take into consideration the following strategies:

1. Start Early: Your money will have more time to grow if you start saving for retirement early. This will help you build a larger retirement fund.

2. Maximise Contributions: Contribute as much as you can to your super fund. This will reduce your taxable income and increase your super balance.

3. Diversify Your Investments: Spread your investments across different asset classes to minimise risk and maximise returns.

4. Seek Professional Advice: Saving money for retirement can be complex. Consider consulting with a financial adviser specialising in self-employed individuals for informed decisions about your retirement options.

Setting Financial Goals

Self-employed individuals face unique challenges in retirement planning, as they manage their savings and investments without the safety net of an employer-sponsored retirement plan.

Setting financial goals and calculating your retirement needs involves a comprehensive assessment of various factors, such as your current expenses, expected lifestyle in retirement, healthcare costs, and inflation rates. 

Creating a detailed budget can provide valuable insights into your spending patterns and help you identify areas where you can potentially save more towards retirement.

You need to devise a savings plan tailored to your specific circumstances. This plan should take into account fluctuations in income, irregular cash flows, and the need for a robust emergency fund. 

As financial circumstances evolve, revisiting your retirement strategy allows you to make necessary modifications and stay aligned with your objectives.

Superannuation Strategies for Self-Employed Aussies

You can maximise superannuation contributions as a self-employed individual in Australia, by implementing the following strategies:

1. Concessional Super Contributions: Salary sacrificing or paying into your super fund from pre-tax income, which can be tax-deductible.

2. Non-Concessional Super Contributions: Paying into your super fund from after-tax income, which is taxed at 15%.

3. Claiming Tax Deductions: Self-employed individuals can claim a tax deduction for super contributions made from after-tax income.

4. Contribution Caps: There are limits to how much you can contribute each financial year, including up to $27,500 in concessional contributions and up to $110,000 in non-concessional contributions.

Let’s give an example. Imagine you are a self-employed Australian graphic designer earning $80,000 annually. Here’s how you may potentially apply the superannuation strategies mentioned:

  • You decide to make a concessional contribution of $10,000 from your pre-tax income to your super fund. This reduces your taxable income to $70,000.
  • Additionally, you make a non-concessional contribution of $5,000 from your after-tax income to your super fund.
  • You claim a tax deduction for the $5,000 non-concessional contribution on your tax return.
  • Since your total contributions are $15,000, which is below the caps, you’re within the limits.

Here are a few more things you can do to make the most of your superannuation strategy:

  1. Research and compare funds to find one that suits your needs and investment preferences.
  2. Consider consolidating multiple super accounts to reduce fees and increase investment returns.
  3. Review your insurance cover through your super fund annually or when your life changes significantly.

Investing for Retirement

You may also consider other investment options like shares, property, and managed funds to build a retirement portfolio. There are a range of alternative investment opportunities in Australia to consider.

Shares: Investing in shares can offer long-term growth potential making it a lucrative option for retirement. 

The S&P/ASX 200 Index, tracking Australia’s 200 largest companies, has yielded an average annual return of 10% over the past 20 years, indicating potential investment growth.

Property: Real estate can be a valuable investment for retirement, providing rental income and potential capital appreciation over time, offering a hedge against inflation.

CoreLogic reports a 7.2% annual growth in Australia’s median house price over the past 20 years. If you bought a property worth $500,000 20 years ago, it would be worth around $1.4 million today.

Managed Funds: Managed funds can offer diversification and access to various asset classes.

The Australian Equities sector has yielded an average annual return of 10.2% over the past 20 years. If you invested $10,000 in an Australian Equities managed fund 20 years ago, it would have grown to around $40,000 today.

Additionally, diversification can help mitigate risks by spreading investments across different asset classes. For instance, if you had invested only in shares and the market crashed, your entire investment portfolio would be at risk. However, if you had diversified your portfolio by investing in shares, property, and managed funds, the impact of the market crash would be less severe.

Tax Considerations

Retirement planning for Aussies with their own business involves navigating tax obligations and understanding the implications of various tax deductions, concessions, and tax strategies.

Superannuation Contributions: Self-employed individuals can make voluntary contributions to their super, which are tax-deductible up to certain limits, such as $27,500 for all ages in the 2023-24 financial year.

Tax Deductions: Self-employed individuals can claim tax deductions for business and retirement planning expenses, including contributions to their super fund, insurance premiums, and financial advice costs.

Concessions: The Australian government provides tax concessions to encourage retirement savings. For instance, individuals who reach preservation age and are 60 and over can access their super account-based pension tax-free. 

Income Streams: Income streams in retirement are taxed differently. Income from a super pension is generally tax-free for individuals aged 60 and over, while investment income may be subject to tax based on the individual’s marginal tax rate.

Tax Strategies: You can utilise various tax strategies to reduce retirement tax liabilities, such as transitioning the business structure to a more tax-efficient entity or strategically timing the sale of assets to take advantage of capital gains tax concessions.

Health and Insurance Planning

You can ensure financial well-being during retirement by incorporating health insurance, income protection, and insurance planning into your retirement strategies.

Integration into Retirement Planning: The Association of Superannuation Funds of Australia (ASFA) provides retirement standards, which include healthcare costs and insurance premiums.  A single 65 to 85-year-old with a modest lifestyle can expect to spend around $44,000 annually on healthcare and other living expenses.

Healthcare Coverage: The Australian Institute of Health and Welfare reports that healthcare costs are rising, and self-employed individuals need to secure health insurance coverage to manage these costs during retirement. A 65-year-old single person with a single premium Medicare supplement policy can expect to pay around $3,000 per year in premiums.

Insurance Planning: The Australian Securities and Investments Commission (ASIC) provides information on life insurance options for self-employed individuals. A self-employed individual can consider income protection insurance to cover their income in case of illness or injury.

Succession Planning and Exit Strategy

Succession planning involves identifying and preparing a successor to take over the business, ensuring its continuity and success after the owner’s departure. This process can be complex and requires careful planning and consideration of various factors.

Estate Planning: One key aspect of succession planning is estate planning. This involves ensuring that the business owner’s assets are transferred to the successor in a manner that minimises taxes and other legal complications. 

Financial Considerations: Another important aspect of succession planning is financial considerations. The business owner must ensure that the successor has the financial resources to continue operating the business successfully.

Transfer of Responsibilities: The business owner must also consider the transfer of responsibilities and decision-making processes. The process involves identifying business roles and responsibilities, ensuring successors can effectively perform these tasks, and creating a comprehensive transition plan.

Plan Your Retirement with Coastal Advice Group

Professional advice from financial advisers or planners can help you with retirement income options and tailor an investment strategy suited to your specific needs, risk tolerance, and retirement goals. 

They can also provide valuable insights and guidance on various aspects of succession planning, including estate planning, financial considerations, and transition planning.

If you want to enjoy retirement with peace of mind knowing there is a financial strategy to take care of the future, speak to the team at Coastal Advice Group. We help our clients enjoy their dream retirement through personalised financial advice. 

Call us or book online to secure your consultation today!