How to Prepare for Retirement When Self-Employed

Article Amended: 30 May 2024

Do you wonder how self-employment affects retirement?

Australian self-employed people must plan for retirement due to their unique challenges, and planning should begin as soon as possible as 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 to 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 personal income during retirement but come with relative investment 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.

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 can help you build a larger retirement fund than if you start closer to retirement.

2. Maximise Contributions: Contribute what you can afford into your super fund. You can refer to the current Superannuation Guarantee Contribution as a guide as to how much to pay yourself – which is currently set at 11% of your earnings. It is imperative that you remain within the annual contribution caps set by the ATO.

3. Diversify Your Investments: Spread your investments across different asset classes to minimise risk and maximise returns given your appetite for risk. Investments will perform differently in different conditions, and spreading your investments means that in theory, you should always have something that is doing well.

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 should also consider devising 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, and are not taxed when they are received by your super fund.

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 $30,000 in concessional contributions and up to $120,000 in non-concessional contributions from 1 July 2024.

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.
Furthermore, assuming no other income, your tax payable would reduce from $16,467 on $80,000 to $13,217 on $70,000.

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

Research and compare funds to find one that suits your needs and investment preferences.
Consider consolidating multiple super accounts to reduce fees and increase investment returns.
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 such as 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 potentially lucrative but also more risky 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.

Property, as with any investment, comes with its own risks, e.g., taking out a mortgage to invest in property will expose you to interest rate movements, alternatively, if you fail to secure a reliable tenant you will be without a reliable source of income for this asset.

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 $30,000 for all ages in the 2024-25 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 typically 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 fortify your plans for 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. Based on the March 2024 quarter data, a single 65 to 84-year-old with a modest lifestyle who owns their own home can expect to spend around $32,915 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. For example, 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: A self-employed individual can consider investing in a tailored and comprehensive insurance package 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 (for example, if they were to retire or pass away). 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 a financial adviser can help you with retirement income options and tailor an investment strategy suited to your specific needs, risk tolerance, and retirement goals as a self-employed person.

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!

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