Phillip Smith Guest Author
Managing Director | Financial Advisor @ Bishop Collins Wealth Solutions
Authorised Representative number 000252870 of Count Financial Limited
“The best way to predict the future is to create it.” – Peter Drucker
As a business owner, you’re used to planning for the future, whether it’s expanding your business, managing cash flow, or investing in new opportunities. But how much thought have you given to your own retirement?
Calculating how much you need to retire is a crucial step in ensuring you can enjoy the fruits of your hard work without financial stress. This guide will walk you through the process, tailored specifically for business owners.
Why Retirement Planning is Different for Business Owners
Retirement planning for business owners is unique.
Unlike salaried employees who rely on superannuation and savings, business owners often have their wealth tied up in their business.
This means your retirement plan needs to consider how to convert business assets into retirement income, manage tax implications, and ensure a smooth transition of ownership.
Business Owners Average Retirement Age and Planning
According to the Australian Tax Office’s SMSF quarterly statistical report (December 2023), the average retirement age in Australia is around 65 years.
However, many business owners often delay retirement beyond this age due to the complexities involved in transitioning their business.
The report highlights a significant gap between the desired retirement age and the actual age of retirement, often influenced by financial readiness and business succession planning.
It’s crucial for business owners to start their retirement planning early to bridge this gap and ensure a smooth transition when the time comes.
Steps to Calculate How Much You Need to Retire
1. Determine Your Retirement Goals
Begin by envisioning your retirement lifestyle. Do you plan to travel? Maintain a certain standard of living? Do you anticipate living a modest or comfortable lifestyle? Support family members? Your goals will significantly impact your retirement number.
Example: John, a 55-year-old business owner, plans to retire at 65. He wants to travel internationally twice a year, maintain his current lifestyle, and support his grandchildren’s education.
2. Estimate Annual Retirement Expenses
List your expected annual expenses in retirement, including living costs, travel, healthcare, and leisure activities. This will help you understand how much money you’ll need to retire.
Remember to account for inflation, typically around 2-3% annually.
For example:
| Expense Category | Annual Cost (Current) | Annual Cost (Retirement) |
|---|---|---|
| Living Costs | $60,000 | $80,000 |
| Travel | $10,000 | $20,000 |
| Healthcare | $5,000 | $7,000 |
| Leisure Activities | $5,000 | $10,000 |
| Total | $80,000 | $117,000 |
3. Calculate Your Retirement Income Sources
Identify all possible income sources during retirement, including superannuation, investments, rental income, and the sale of your business. This will help you to determine how much income you can expect when you retire.
Example: John expects the following annual retirement income:
- Superannuation: $30,000
- Investments: $20,000
- Rental Income: $15,000
- Sale of Business: To be determined
4. Determine the Value of Your Business
Evaluating your business is critical. Consider hiring a professional valuer to get an accurate assessment. This value will form a significant part of your retirement fund.
Example: John’s business is valued at $600,000. After selling it, he plans to invest the proceeds to generate an annual income.
5. Calculate the Retirement Gap
Subtract your expected retirement annual income from your estimated expenses to determine the retirement gap.
For example:
| Annual Retirement Expenses | $117,000 |
| Annual Retirement Income | $65,000 |
| Retirement Gap | -$52,000 |
6. Determine the Retirement Number
Calculate how much you need to save or invest to cover the retirement gap. A common rule of thumb is the 4% rule, which suggests withdrawing 4% of your retirement savings annually. Multiply the retirement gap by 25 to get your retirement number.
Example: John’s Retirement Gap: $52,000 Retirement Number: $52,000 * 25 = $1,300,000
John needs to ensure he has $1,300,000 in savings or investments to generate $52,000 annually.
Tax Considerations for Business Owners
The Australian Tax Office (ATO) provides several guidelines and concessions for small business owners planning their retirement. Here are a few key considerations:
- Small Business CGT Concessions: These concessions can significantly reduce the capital gains tax when selling your business. Consult the ATO website for detailed information and eligibility criteria or get in contact with one of the Bishop Collins team to discuss your personal circumstances.
- Superannuation Contributions: Consider making additional contributions to your superannuation fund to boost your retirement savings. The ATO allows concessional contributions, which are taxed at a lower rate.
- Investment Strategies: Diversify your investments to include tax-efficient options such as dividend-paying stocks, managed funds, or real estate.
Optimising Tax with a Self-Managed Super Fund (SMSF)
Starting early with a Self-Managed Super Fund (SMSF) can significantly optimise your tax and enhance your retirement savings.
An SMSF offers greater control over your investment choices and the potential for substantial tax benefits. For instance, contributions to an SMSF are taxed at a concessional rate, and earnings within the fund can benefit from reduced tax rates, especially in the pension phase.
By strategically managing your SMSF, you can minimise your tax liabilities and maximise your retirement savings.
At Bishop Collins, we can help you set up and manage an SMSF tailored to your specific needs, ensuring you leverage all available benefits for retirement planning. Contact our team today to explore how an SMSF can be a pivotal part of your retirement plan.
Retirement Planning Timing and Structure
Timing the sale of your business and structuring your assets efficiently is crucial for tax optimisation and maximising retirement income.
Plan the sale during a high market period and consider using family trusts or self-managed super funds (SMSFs) to manage and distribute your assets.
Avoid Common Mistakes
1. Underestimating Expenses
Ensure you accurately estimate your retirement expenses. Consider healthcare costs, travel, and unexpected expenses.
2. Overlooking Tax Implications
Understand the tax consequences of selling your business and other income sources. Consult with a tax professional to minimise liabilities and optimise your tax contributions.
3. Delaying Retirement Planning
Start planning early to maximise your savings and investment growth. The earlier you start, the more time your investments have to grow.
Start Planning Early
Calculating your retirement number is a critical step in securing your financial future. As a business owner, your retirement plan requires careful consideration and strategic planning. At Bishop Collins, we specialise in helping business owners navigate retirement planning, ensuring a smooth transition and maximising your retirement income.
Don’t leave your retirement to chance. Contact our team today to discuss your retirement goals and create a personalised plan tailored to your needs.
You’re not alone in business, and you’re not alone in planning for your future.
Let Bishop Collins guide you to your version of success.
Hunter Financial is an authorised representative of Count Financial Limited ABN 19 001 974 625 holder of Australian financial services licence number 227232 (“Count”). Count is owned by Count Limited ABN 111 26 990 832 of GPO Box 1453, Sydney NSW 2001. Count Limited is listed on the Australian Stock Exchange.
General advice warning: The advice provided is general advice only. In preparing it we did not take into account your investment objectives, financial situation or particular needs. Before making an investment decision on the basis of this advice, you should consider how appropriate the advice is to your particular investment needs, and objectives. You should also consider the relevant Product Disclosure Statement before making any decision relating to a financial product.
