As a small business owner, you likely juggle a lot of daily demands. With so many day to day activities eating up your time, you might now have taken time to even think about retirement. A BMO Management Survey of 400 small business owners revealed that a striking 75% of survey respondents age 18 to 64 had saved less than $100,000 for retirement. Respondents from age 45 to 64 were only slightly more prepared; 32% had over $100,000 in retirement accounts and only 11% had more than $500,000.
If you are one who hasn’t thought much about retiring, I’ve got some tips to get you started.
Diversify
Many business owners view their companies as their biggest assets. However, it shouldn’t be your only asset. There is something to the old adage “do not keep all of your eggs in one basket”.
For example, if your business fails, you’re not left with much if haven’t diversified. And that doesn’t bode well at all for your retirement. I definitely understand the immediate priority of small business owners is to plow those earnings right back into the business to grow, but, it shortchanges you in the long run.
Consider giving yourself a raise so you can contribute to a 401(k) or IRA. Ideally you would max out your contributions, but, if that makes you uncomfortable, something is always better than nothing. As a bonus, your contributions will help trim your tax bill now and grow tax-deferred until you make withdrawals in retirement.
Planning is critical
Traditionally, most people need about 70 percent of their current annual income to live comfortably in retirement. For small business owners, the process of arriving at “your number” can be a bit more complex. It requires knowing what your business is worth, both in a lump sum and if broken into payments. Only about 10 percent of business sales involve the entire business as one lump sum. You might receive payments over a 3, 5 or even 7 year timeframe. This again brings me back to the #1 tip above, and why it is so important to diversify. If you don’t receive a lump sum for your business, you will need your 401(k) or IRA income.
Because of the complexity involved, I highly recommend working with a wealth advisor or certified financial planner in determining your target number for retirement and your investment strategy. Having this plan in place will give you confidence in when and how to retire from your small business. Plan to start this process at least 10 years before retirement, and reevaluate and recalculate as you more closely approach your retirement date.
Don’t Wait too long to sell
Selling a business can be a very time-consuming process when done correctly. If your plan is to sell your business when you’re ready to retire, consider starting to find a buyer within 3-5 years of your planned retirement date. Pre-planning your sale can take up a good chunk of time, and the actual execution of the transition can take nine to twelve months.
The downside to pre-planning the sale of your business is that you do actually have to set an expected retirement date and stick to it, but not doing so puts you at risk of health issues and decreased productivity as you age, which in turn can potentially mean a less profitable company.
Grow your business
This might sound obvious, but a key part of preparing for retirement if you are a small business owner is growing the business. An owner of a well-run growth company can easily get 50 to 70 percent of the value of assets in a buy-out or about three to four times the revenue. This can make a huge difference in your retirement!
If you are a sole proprietor or only have maybe 1-2 employees, I recommend you focus on growing your business enough to add at least 3-4 employees. If this sounds daunting, consider enlisting the help of accountant, and a business growth advisor. Growing your business requires you to be less tactical and more strategic in managing your business, but investing in this growth now can make a big difference in your nest egg for retirement.
As Alexander Graham Bell said, “Preparation is the key to success.” Interested in learning more? Get in touch with me today!
