Given the recent talks around retirement options for employees, one may ask what options are available for small business owners to secure their financial future. With the local entrepreneurial landscape continuing to thrive, ensuring financial security remains a critical concern for business owners. Property Point shares valuable insights on common financial mistakes they have noted over the years and strategic measures they have used to advise SMMEs on securing a more stable financial future.
Property Point financial expert Thabani Mbhense says that entrepreneurs often make similar financial errors as individuals in employment, with procrastination of financial planning, assuming there's ample time before retirement, being one of the common factors. “Many entrepreneurs fail to review their current strategies or investments to ensure they will be adequate for future needs,” he says. Mismanaging debt can lead to high-interest liabilities that erode net asset value, while maintaining unsustainable, lavish lifestyles can also be detrimental. It is a frequent trait for these individuals to neglect budget management and contributions towards financial security, as well as not starting to save at an early age.
While there is no distinct method of setting up for retirement when it comes to entrepreneurship, considerations must be tailored to individual economic situations and future financial needs. Unlike employees, entrepreneurs must independently plan, seek advice, and make financial contributions without employer support. It is crucial to start retirement planning immediately if it has not already been done. Entrepreneurs should combine contribution plans from financial institutions with personal investments and include invest in an emergency fund. Utilising tax-free investments, stable annuity funds, and government bonds can also be beneficial.
Though reinvesting in the business is crucial, maintaining a retirement plan is equally important. Thabani advises that entrepreneurs should ideally invest 12-15% of their income in retirement savings unless needed to keep the business afloat. "Through observation, we have found that the retirement annuity is advantageous for entrepreneurs due to its flexibility, allowing them to contribute according to their retirement strategy without employment constraints," he expressed.
Entrepreneurs ought to diversify across asset types, locations, and sectors or industries. This means investing in equity, bonds, ETFs, real estate, different countries and regions, and various industries like energy, finance, and technology. Professional advice is crucial, and entrepreneurs should look for advisors with qualifications, experience, professional body memberships, and regulatory body registrations.
Consolidating retirement savings within one's own business exposes them to business risks. A diversified strategy can mitigate these risks. Entrepreneurs should shift towards less aggressive investments, such as bonds, which offer fixed income and lower volatility. A diversified portfolio including real estate and commodities can guard against inflation, and including assets with varied risk profiles can manage market volatility.
Considering the expected retirement age, inflation impacts, rising medical costs, and potential emergencies, setting regular annual intervals to review retirement plans is crucial. Consult financial planners periodically, for example, every three years or when making significant decisions.
Seeking quality advice, spending adequate time planning, and aligning investments with future financial needs can help avoid high fees, poor diversification, and emotional investing. Investing in fixed-income assets like bonds, contributing to retirement annuities, or purchasing life annuities are sound strategies. Establishing an emergency fund with flexible investment options and considering tax-free investment accounts and unit trusts, which offer a range of choices and have shown favourable returns, can also provide financial stability.
PERSONAL FINANCE