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Healthy superannuation habits for Australian women starting their own business
There’s an exciting trend emerging in the Australian business landscape – more women are embracing entrepreneurship and starting their own businesses. According to the Australian Bureau of Statistics, women account for 34% of business owners in Australia and that’s a 46% increase in the last 20 years. Whilst this is much cause for celebration there is one aspect of entrepreneurship that is putting women at risk of financial hardships and that’s their superannuation balances.
Research from the Associate of Superannuation Funds Australia revealed that self employed women have the lowest superannuation balances compared to employed women, employed men and self employed men. Naturally there’s a lot to think about as a business owner. There’s bills to pay, content to create, orders to fulfill, clients to respond to – the list goes on. So your retirement plan is likely to be low on your list of priorities. In addition to this, many business owners also choose to prioritise investing profits back into their business rather than grow personal wealth in the hope that they’ll sell their business and retire comfortably with the proceeds. In other words, they’re putting all their wealth eggs in the one basket which is a hugely risky approach. Happily this can be easily mitigated with a little bit of knowledge and some healthy financial habits that include diverting some business profits into your superfund where it can compound and grow into a juicy portfolio that provides you income to live off in your twilight years..
Superannuation explained
Outside of the family home, superannuation is likely to be the largest asset an individual owns. It’s Australia’s retirement savings scheme. Contributions are made to your fund throughout your working career, the money is invested where it compounds and grows into a sizeable pool of money to fund your lifestyle when you stop working. The earlier and more consistently you contribute to your super, the greater the potential for growth due to the power of compounding.
The best thing about superannuation is that it enables you to retire on your own terms and maintain financial independence. It provides a source of income that is independent of government support, allowing you to enjoy a higher standard of living and greater freedom in your retirement years. For women, who often face unique financial challenges such as career breaks for caregiving and a longer life expectancy, superannuation is especially vital in ensuring that they have the financial resources needed to maintain independence and security in retirement.
Why Women Entrepreneurs Fall Behind when it comes to Retirement Savings
Women generally face unique challenges when it comes to building wealth, particularly retirement savings in superannuation. For women entrepreneurs, however, there’s additional challenges.
- Lower average income due to the gender pay gap and career breaks for family care, such as maternity leave, result in lower super contributions.
(Use content to create graphics). For example, a woman has a baby at age 30 and takes a two year career break. Assuming she’s earning the average wage of $1,456/week (ABS) that results in $16,656 of lost super contributions. That doesn’t sound like a lot but fast forward 35 years with the power of compound returns (assume growth at 6.7% less investment fees) and that figure grows to $159,092 missing from her retirement savings. - Women’s longer life expectancy requires more substantial retirement savings.
- Lower financial literacy means women are often less confident and proactive about investing.
- The burden of the invisible mental load results in them having less time to prioritise retirement planning.
- Superannuation contributions aren’t compulsory for those operating as a sole trader or in a partnership.
- Tight business cashflow means there’s limited to no funds available to contribute to super.
- Prioritising business growth over retirement savings is common amongst business owners meaning there wealth is concentrated to their business.
Neglecting superannuation can lead to significant shortfalls in retirement savings. Can you make additional contributions to plug the gap in retirement savings when you’re older? Yes, you can but you’re going to have to make much larger monetary contributions in a short amount of time to catch up.
Why it (literally) pays to priortise your Superannuation Contributions
As mentioned previously, prioritsing superannuation contributions pays off significantly due to the power of compounding returns, where early and consistent contributions can grow your retirement savings substantially. Let’s look at an example. Say one woman starts contributing $10,560 of business profits annually (that’s just over $200/week) to her super at age 25. Assuming an average annual return of 6%, she could accumulate approximately $1.7 million by the time she reaches 65. If, however, she starts contributing the same amount annually but waits until age 40, her savings would grow to only $600,000 by retirement. That’s less than half.
At risk of sounding like a broken record, neglecting superannuation can lead to a less than desirable lifestyle in retirement, even poverty as evidenced by the fact that women over 55 are the fastest growing cohort living in poverty. Superannuation is crucial for ensuring financial security and independence later in life, providing the freedom to retire comfortably without relying solely on government support or family. Prioritising super now can mean the difference between living off baked beans on toast and getting cold in the winter because you can’t afford heating or cruising the Mediterranean with your besties and accessing the best health care.
Practical Tips to Pay Yourself Superannuation as an Entrepreneur
Treat it like any other business expense
Keep track of your superannuation and adjust your contributions as your business grows.
Automate it
Set up direct debits to your super fund ensuring that even small amounts are consistently added.
Review and Adjust Regularly
Keep track of your superannuation and adjust your contributions as your business grows.
Take advantage of tax savings
Contributing to your superannuation offers potential tax benefits that can make a significant difference to your overall financial picture. Contributions made before tax (known as concessional contributions) are taxed at a lower rate of 15%, which is often less than your marginal tax rate. This reduces your taxable income and also allows more money to be invested in your super, boosting your retirement savings. Additionally, making after-tax contributions (non-concessional contributions) may make you eligible for the government’s co-contribution scheme, further enhancing your super balance.
Consider a Self Managed Superfund, if appropriate
An SMSF allows you to take control of your super investments, giving you greater flexibility in how your retirement savings are managed and may even allow you to buy the premises from which your business operate. However, it comes with responsibilities, including legal and administrative duties, which can be time-consuming and complex. The costs of running an SMSF can also be higher than those of a regular super fund, so it’s essential to weigh the pros and cons before deciding if this option is right for you.
Seek Professional Advice
Consider consulting a financial advisor to develop a tailored superannuation strategy.
You're in control!
Taking charge of your superannuation as a small business owner is not just a smart move—it’s essential for securing a fabulous financial future. While building and growing your business is important, it’s equally crucial to ensure that you’re setting yourself up for a comfortable retirement. By making consistent super contributions, taking advantage of tax benefits, and seeking professional advice when you need it, you can build a strong financial foundation that supports both your business ambitions and your long-term financial independence.
With a proactive approach and some savvy financial habits, you can look forward to a retirement that’s as rewarding as your entrepreneurial journey. Don’t leave your future to chance—start prioritising your superannuation today!
Jessica Ritchie
