OPINION: The self-employed are the forgotten of personal finance.
Almost everything you read or hear on personal finance assumes that people are receiving a nice regular pay cheque every second Thursday or once a month. Advice is more tailored to those who have employment rather than own a business.
A survey I read last week out of the US suggests that 28 per cent of the self-employed are not saving for retirement against just 10 per cent of those in employment. The US has different savings plans and incentives than New Zealand and I am sure that the numbers vary here, but the principle remains: the self-employed almost certainly do not have savings plans to anything like the degree of employed people.
A second study from the US showed that small business owners plan to retire at a later age than salary earners: business owners in the US expect to retire at age 72 against salary earners at age 68. It is hard to know whether this would be duplicated in New Zealand and there could be various explanations for retirement at an older age: it may be that owners love their businesses (voluntarily extending the retirement date) or perhaps they do not have enough retirement savings (no choice but to extend the retirement).
New Zealand has around 450,000 small businesses. If the owners are not planning properly for retirement, there may be trouble down the track. I think some research on how these people handle their own personal finances and the pattern of retirement savings by the self-employed would be useful.
There are probably two reasons for business owners to neglect retirement savings and, therefore, postpone retirement: the first of these is that most businesses have an insatiable appetite for capital and many small businesses are thus chronically short of cash. There is always something to invest in or to develop within the business which seems to the owner a much greater priority than saving for retirement (a new delivery van, another staff member, etc).
Farmers in particular have great investment demands on their limited cash which they want to spend on the farm rather than put to off-farm investments. Why, business owners think, would I put my precious cash into retirement savings when I could invest right here in my own business or farm?
Second, is something that I have written about previously: the business often is the retirement plan. The idea is that business owners reinvest to develop and grow the enterprise so that it becomes worth a substantial sum: when retirement beckons, they will sell the business to live off the proceeds. This continual reinvestment back into the business has a couple of fish hooks: first and most obviously, there is a concentration of wealth to just one asset (the business). There are plenty of instances where people have gone to sell the business as they approach retirement age to find that the business is caught in a downturn and, with profits well down, the business has little or no value (not enough to fund a decent retirement, at any rate).
Second, business owners may think that they have a business, but in reality they have self-employment. In effect they have not built up anything that a new owner will pay good money to buy: the "business" is really just the owners and any goodwill walks out the door when they do. What they have is not something which can be sold to someone who will take it over and keep it running seamlessly - it is effectively a job (and you can't sell a job).
In my experience, many self-employed go out of business rather than sell their businesses - that is, they simply discontinue operations rather than sell. And, if they have not been saving, they will have little or nothing for retirement.
The self-employed need retirement savings just as wage and salary earners do.
The thing that they need to think about is whether the business is a genuine business which can be sold. This requires an honest appraisal regarding whether someone will buy it (and if so, for how much). Even those who are confident that they are building something which can be sold for good money, need the additional diversification. At the very least this means joining KiwiSaver, but ideally business owners need a bigger savings and investment plan which will mean that they are not completely reliant on the value of the business for their retirement.
Martin Hawes is an authorised financial adviser and a disclosure statement is available on request and free of charge, or can be found at martinhawes.com. This article is of a general nature and is not personalised financial advice.
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