Retirement planning for sole traders

6 min read
Emma Fletcher

There are lots of perks to being self-employed: the thrill of being your own boss, the freedom to set your own hours and the satisfaction of knowing your hard work is supporting your own dream, rather than someone else’s. But there’s a fundamental part of running your own business that often drops down the list of priorities: retirement planning.

When you work for yourself, there’s no employer contributing to your superannuation.

Saving a significant nest egg for your future all comes down to you. It’s up to you to plan for your future, and the sooner you get started the better.

Plan for your retirement in 3 steps

Here, we’ll look at the steps to retirement planning for sole traders so you can head towards the future with confidence.

  1. Estimate how much you’ll need.
  2. Consider all your sources of income.
  3. Pay your own superannuation.

Now let’s walk through the process step by step, including all your superannuation options.

1. Estimate how much you’ll need

Retirement Planning Arrow Drawn on Pavement
The first step to retirement planning is to estimate your retirement needs.

When you’re thinking about your retirement, it’s important to consider not only where you’ll get the money but just how much you’ll need.

This way you’ll have a realistic goal to work towards.

Calculating how much you’ll need to support yourself in the future is a bit like asking how long is a piece of string. No one knows exactly how long their retirement years will be.

Still, it’s important to have an estimate in mind. It also comes down to the kind of lifestyle you want to have and anticipating what the big costs of retirement are likely to be.

The government’s handy retirement planning calculator can help you work out what income you’re likely to have from your super fund and the Age Pension (if you’re eligible). It will also tell you what impact working part-time or taking a break from work will have on your super.

2. Consider all your sources of income

There are more than a few ways to earn income in your retirement — as long as you plan ahead.

Don’t just rely on being able to sell your business to fund your retirement. Many business ventures can be hard to sell. And if you’re the face of your company, it may not be worth as much without you in it.

  • Other retirement income streams could be:
  • Income from your superannuation fund
  • The Age Pension
  • Income from investments made outside your super
  • Proceeds from selling the family home or other assets
  • Working part-time

Not all of these will necessarily be applicable, but it gives you an idea of the different ways you can support yourself after retirement.

Combining a couple of different types of income is ideal — for instance, investing some of your money in assets outside of your super fund that will grow over time, like shares or property. That way you’re not putting all your nest eggs in one basket.

3. Pay your own superannuation

Retirement Planning Stacks of Bills
Sole traders aren’t required to pay their own super, but they can if they choose.

If you’re a sole trader, you’re under no obligation to pay yourself superannuation. But deciding to start building a separate pool of savings early on is a wise retirement planning move.

Superannuation is the No. 1 most tax-effective investment for retirement.

By making regular contributions, you may be eligible to claim a tax deduction of up to $25,000 annually in contributions to your superannuation fund.

If you don’t yet have a super fund, the ASIC website has a helpful checklist to help you make an informed choice.

How to consolidate your super

Many people have a succession of jobs in their lifetimes and often end up accruing a number of different super funds. And if you’ve ever changed your name or lived overseas, it’s possible you may have lost track of some of your super.

So the first step is to make sure you know where all your super is. You can track lost or missing super by registering for ATO online services via the myGov website.

Take the time to streamline your super and merge it all into one fund, so that every dollar you’re entitled to is in the one place.

Start making voluntary super contributions

This is fairly straightforward, with most funds giving you the option of paying by BPAY, direct debit or through your bank account.

As a rule, voluntary superannuation contributions are tax deductible — but be careful not to go over the contribution caps, or you will cop a penalty tax.

You’ll need to provide your Tax File Number (TFN) in order to make the contributions and be eligible for the tax concessions. All contributions must be received by your super fund by June 30 to qualify for the annual deduction.

Super co-contribution

The super co-contribution scheme is designed to help boost the retirement savings of low- to middle-income earners.

If you qualify and make contributions to your super fund, the government will also kick in up to a maximum of $500.

The exact amount depends on your income and how much you contribute throughout the year.

Eligibility is determined by two income tests:

  • The income threshold
  • The 10% income test, whereby 10% or more of your income must come from employment or business

There’s no need to apply, as eligibility is assessed when you lodge your tax return. If your super fund has your TFN, the government contribution is paid into your super account automatically.

Self-managed super funds (SMSFs)

Often referred to as DIY super, SMSFs are private super funds regulated by the ATO that you manage yourself.

SMSFs are a lot more complex and have high setup and yearly costs.

They also usually require time, effort and legal and financial knowledge to manage. Not the best option for beginners; a SMSF is better suited to those with a large account balance.

Retirement planning: Feather your nest

Planning for your retirement as a sole trader may not be an obvious priority right now but it’s an essential part of running a business. No one else is going to look after it except for you, so the sooner you can take steps toward saving, however small, the better.

Begin by tracking down any lost super you might have and consolidating it all into one fund. Then start making regular voluntary contributions. Be sure to seek out the right advice so you can work out the financial arrangement that will work best for you.

Start growing that nest egg today — your future retired self will thank you.

The information contained in this blog post is provided for informational purposes only, and should not be construed as an endorsement or advice from GoDaddy on any subject matter.