What’s in it for the self employed.

I recently read an interesting article on how Self Employed are not saving enough for Retirement and it got me thinking about the self-employed in Singapore. Well, mainly because I am a self-employed myself and because many of my clients are business owners. The conclusion I came to?

1. Self employed do not save enough
2. Self employed, in particular the small business owners, run the risk of betting too much on the future

But first off, here are some key points from the survey:

• 7 in 10 Self employed are not saving regularly for retirement, if at all
• 53% of employed have a fixed amount deducted from their paycheck on a regular basis; to save for retirement while only 8% of self employed do that
• Self employed tend not to have clear distinction between their business cash and personal cash.

Generally, I believe the disparity could be greater in Singapore’s context because self employed are not required to contribute to CPF (except for medisave).To illustrate this, let’s look at John & Jane.

JOHN is a traditionally employed earning $60,000 a year ($69,600, after including employer CPF contribution)

• After the 20% employee contribution, his take home pay is $48,000
• His total annual mandatory CPF contribution is $21,600 (16% employer, 20% employee)
• John, like most people, sets aside 20% of his take home income for Retirement. Hence, the additional annual saving is $9,600

Together with the CPF contribution, John’s total annual saving is $31,200. This is 44.8% of his income.

On the other hand, Jane is a self-employed (an SME owner drawing about $69,600 per year.

• She sets aside $4,200 due to the mandatory medisave contribution
• Jane, like most others, also sets aside 20% of her income for retirement. Hence, the additional saving is $13,080

Jane’s annual saving is hence, $17,280. This is 24.8% of her income.

For John and Jane, both their perceived savings is the same (20%). Yet, by absolute amount, John is socking aside alot more. Such a perception ‘of saving enough’ can lure one into a false sense of security.
In addition, Jane is also likely to redirect her profit/salary back into the business, with the belief that the business will ultimately become her retirement’s income generating asset (a resource that give a future income).
This is yet another risk as it rides on the assumption that the business is ongoing after she retires – that there will always be someone who is willing and able to take over the business and that the business would continue to be profitable and sustainable in the future business climate. So it would be good for business owners to ask themselves: are they betting too much on the future?

So for the self-employed out there (or for those planning to become one), are you saving enough or are you also betting too much on the future?

Financial Planning for self employed is very different from the traditionally employed- more pitfalls to avoid, more risks to manage. The variation in income and expenses also require planning that is malleable and that the saving/ investment vehicles utilized are able to respond to the varying needs and responsibility of the business., Other considerations also include tax planning and the business stage of development. While more complicating, the additional effort is worthwhile because good business and personal cash management can enhance present success and peace of mind for the future can both be enhanced.