The importance of entrepreneurship and the people who drive it can never be overemphasised. The main reason could be that entrepreneurs create new products and services, thereby stimulating the micro- and macro-economy. Maybe it is because entrepreneurs create and disrupt the normal into a new normal by challenging the status quo. Whatever the reasons are, most people acknowledge that entrepreneurs create jobs and wealth, influence the community and community development, and in general improve products, services, and the lives of people.
For many entrepreneurs, the current climate of lockdown, limited movement and a ban on certain products are a horror story on its own. Add to this the usual challenges of limited cash flow, sales, marketing, taxes and trying to stay ahead of the pack and you are left with two things on the backburner – paying yourself a salary and preparing for retirement (no matter your age).
Most business owners admit they either are still young and will make up for lost ground later when the business is more successful, or they plan retirement around the successful sale of their business. And since the reality is mostly the opposite in this volatile and risky environment, most entrepreneurs are most likely setting themselves up for a lifetime of hardship by being totally unprepared for retirement.
Since South Africa has one of the lowest savings rates in the world, don’t make the mistake that you will change and form the habit of saving later in life. You won’t, trust me. Statistics don’t lie.
So, what to do? Here are six steps to help you prepare for retirement as you, after many years of dedication to be an entrepreneur, duly deserve:
1. Diversify Investments
In South Africa there are mainly three options that include a Retirement Annuity (you cannot touch this money before you are 55), a Tax-free investment (maximum contribution of R33 000 per annum, or R500 000 your entire lifetime) and investing your money in various investment portfolios. Most likely the Tax-free investment will not be enough, and the stock exchange can be a very risky game, so a holistic investment plan using a variety of asset classes is a more viable option. Take note that your most important commodity in all these options is TIME. Start as early as you can for good returns.
2. Plan ahead (short term)
Set aside three to six months’ worth of household expenses to help you get by during the lean months, or when an unexpected lockdown strikes. Once this is established, build a second, separate fund to help cover emergencies. With these saving cushions in place, start by saving diligently for retirement. It is hard, and it doesn’t come quickly, but it will make a big difference for your future peace of mind.
3. Plan an exit strategy (medium to long term)
Whether you are a young entrepreneur or an older version who still garners the tenacity to grind a business to success, you have to know what you want to do when you retire. Are you planning to sell the company and live off the profit you’ve made? Or maybe you are planning to transfer the company’s ownership to one or some of the employees? Whatever you do, do not leave things too late. Even if it is many years into the future, you have to think about succession planning, grooming the right leader(s) and making sure you, as a personal brand, are separated from the business when you are ready to sell it.
4. Have a flexible budget
First of all, you must be VERY WARY OF DEBT! Thinking how your budget can be supported by your investments to last for your whole retirement period should be a top priority. Secondly, since income can be unpredictable, your budget and payments could be altered from time to time, but this should be the exception, not the rule. Be aware of your cash flow and remember, it is sometimes harder to stick to a budget than to be an entrepreneur.
5. Automate your savings
Take time off from your diary, sit down and review your earnings over the past 12-month period. You should be able to establish an average that you can set aside as savings on a monthly basis. Start saving this amount, but crucially, AUTOMATE the deduction to your retirement account. It is so easy to skip a payment or two because you are putting it back into the business. Don’t. Set up that automated transfer and forget about it. You will be extremely grateful the day you retire.
6. Reduce and eliminate your debt
Investing and making deposits into your savings account or a Retirement Annuity are not the only way to ensure a worry-free retirement. The most overlooked step or opportunity to have money available is to reduce and, if possible, eliminate your debt. Paying off debt can be the best investment you will ever make, and emotionally, it’s also the most rewarding.
By following these six steps, you should be much closer to a financially free retirement. Above all, most entrepreneurs are working extremely hard, and using the services of a financial adviser can simplify and eliminate difficult decisions.