The big funding shortfall

A recent survey shows that over half of all Australians don’t expect to have enough money to retire on. NAB Group Chief Economist, Alan Oster and General Manager of Wealth, Business Banking, Iain Rogers look at how small business owners and individuals can better prepare for retirement.

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When it comes to the great Aussie retirement dream, it pays to start making contributions to your super sooner rather than later.

More than one-third of Australians believe they’ll have far from enough money to retire, while another 25 percent anticipate a shortfall in their retirement savings. These are just some of the findings in MLC’s Retirement Survey released in August this year.

However, not everyone believes they’re ill-prepared for retirement, with under-30 year old males the most optimistic. Many men in the 18 to 29 year old category believe they are ‘bullet-proof’ or simply don’t care about something they consider to be very far off in the future, says NAB Group Chief Economist Alan Oster.

The closer people are to retirement, however, the more concerned they become, and this is reflected in the survey’s finding that females aged 50 plus had the lowest expectation of financial sufficiency come retirement.. It’s in the last five years prior to retirement that people rush to save, according to Oster.

Trying times

Iain Rogers, General Manager of Wealth, Business Banking, says there are cogent reasons why some people have been resisting saving for their retirement in recent times.

He notes that small business owners in particular have had different priorities over the past few years. “If business owners are focusing on keeping staff employed, keeping the cash flow solid through a business, then their ability to contribute to their retirement savings will be impacted. We’ve seen a lot of that over the last period. It’s understandable that they’re focusing on consolidating their businesses. It’s their form of income that lets them do everything else.”

He adds that small business owners tend to fall into a cycle of building up their business for a long time, before consolidating and then exiting. “While they’re doing that, they mightn’t have the funds to contribute to a super fund in the way they’d like.”

At the same time, many small business owners are likely to view their business as their principal retirement vehicle. “Rightly so in some cases,” acknowledges Rogers, “but we know it’s not always the most efficient or tax effective retirement vehicle.”

The failure to protect

The MLC Retirement Survey also questioned the genesis of people’s assumptions – and exactly why they thought they wouldn’t have enough money at the end of their work life.

The results were revealing. Top of the list was taking ta career break to raise kids. Next came risk of unemployment, followed by ill health. The expectation of a longer life was in fourth place.

While people recognised major health issues and unemployment as major barriers to saving enough money, there was no sign that they’re doing much about it. Rogers confirms that Australia is one of the least protected nations in the world from a life insurance perspective. “It’s something we need to address, both in terms of education and affordability.”

Superannuation can make insurance more affordable by accessing group-type premiums and making insurance more easily accessible to people. According to Rogers, the government has a part to play in educating and supporting people’s efforts. He has seen some progress in this regard. “We’ve seen legislative changes with regard to self managed super funds,” he says. “Trustees now have to consider insurance whereas previously they didn’t. That’s a signal that those sorts of considerations have to be taken into account.”

The to do list

So what are the most important steps to saving for retirement? Putting money aside is the obvious place to start, says Oster. “Compound interest is a wonderful thing.”

It also helps to have a plan. For SME owners it’s important to plan for your retirement just as you’d plan for your business, says Rogers. “Very few people would be successful if they didn’t understand where they were trying to head to and the steps involved in getting there. The people who think it’ll be OK and believe they can work it out down the track generally won’t achieve their retirement goals.”

However, Rogers believes business owners are well placed in this regard. “If business owners apply the same rigour they apply to planning and running their business, they can be very successful in achieving their retirement goals.”

The concern is that small business owners often choose a self managed super fund (SMSF) and don’t always put the necessary hard yards into maintaining it. Evidence of this can be seen in the fact that many aren’t carrying out their duties as trustees of their funds effectively, says Rogers. “If you can’t put the work into an SMSF, you may want to consider looking at alternatives,” is his conclusion.

But whatever superannuation fund you choose to join, financial advice is imperative. “Especially for small business owners, retirement planning can be relatively complex because it does cross over to succession planning, to insurance planning – protecting both the business and family members,” he says.

This means getting your strategy right and making it as tax effective as possible can be a considerable challenge.

Rogers argues that people still don’t seek advice to the extent they should, which is ironic given MLC’s Wealth Sentiment Survey found lack of a formal investment plan was a key reason people believed they wouldn’t have enough funds set aside come retirement.

He thinks people are better placed than ever to approach a financial adviser. “People now have the ability to educate themselves online or through other methods so they can have informed discussions with an adviser.”

And for business owners it should never be an issue, says Rogers: “Small business owners are very good at taking advice on matters they’re not experts on.”

This article has been updated since it was first published in Business View magazine (May 2014). For more articles and interactivity, download the iPad edition of Business View for free via our app, NAB Think.

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