Many small business owners are so busy growing their businesses that they put off planning for retirement. The SBA reports that small business owners over the age of 50 are far less likely to have concrete retirement plans than employees working for larger companies. The same report also found that small business owners were later to retire, while some might not retire at all.
Here are simple steps all small business owners can take right now to prepare for retirement in the future.
Develop a Life Goals Plan
Taking a hard look at the numbers is the first step. A simple retirement model can give you a simple planning and saving road map. It’s common to make the mistake of underestimating the cost of future living expenses and overestimating the cost of future static income. Running the actual numbers on basic retirement models can help you see if you’re in the right ball park.
Here are some important lifestyle questions to guide you:
- What are your predicted sources of retirement income?
- Where do you want to live, and what is the cost of living there?
- Have you accounted for both increased cost of living as you age, and the added expense of health issues?
- What age do you want to retire, and how much do you need to save each month to make it happen?
Have an Exit Strategy
One important factor to consider is what will happen to your business when you retire. Will you pass it on to family or sell the company to another business or owner? Will you have someone currently working for you take over and buy out your interests? Do you have an early escape plan if health issues force retirement sooner than you had intended? Knowing your future exit strategy can help guide today’s important business decisions.
Appraise the Future Value of Your Business
Your business might be your biggest asset, but how do you know what it will be worth when you’re ready to retire? One of the hardest questions for a business owner to answer is what the true market value of the business will be down the line.
Some small business owners might not have retirement plans in place because they plan to sell their businesses to fund all or part of their retirement. While this may be a viable solution, it relies on speculation and many small business owners significantly overestimate what a buyer will pay for their business. Unfortunately when the time comes, selling a business might not provide the necessary capital, especially in the event of a long retirement or the added burden of age-related health costs.
One of the biggest mistakes a small business owner can make when preparing for retirement is overestimating the value of their business. Counting entirely on the sale of the business to fully fund a long retirement is problematic for many reasons. As you age, so potentially does your clients base, and an older demographic might not be attractive to a brand-new buyer. Likewise, if the success of your business lies in part with your personal customer relationships, your leaving the business can bring the value down.
These factors come into play when conducting a business valuation or estimating the future salability of your small business. Obtaining a comprehensive business valuation by a certified financial planner that is trained to consider these X factors, as well as market projections and fluctuations, is a worthwhile endeavor when planning for retirement.
Consider Your Other Assets and Investments
Now that you’ve answered basic questions to guide you and looked at what your business is worth, it’s time to consider other assets and investments. Know what income your investments need to produce as part of your retirement plan and adjust your investments accordingly to meet those needs. This might be another time where it would be productive to work with a financial planner so you can best maximize your future income.
Consider Your Retirement Planning Options
The good news is that small business owners have more options available to them than traditional employees. One of these options is the flexibility of the date of your retirement. You may choose to retire early, or choose not to retire at all. It’s up to you to determine exactly when to stop working.
You have also have different options for your money. Consider a regular or Roth IRA (Independent Retirement Account). There are also SIMPLES (Savings Incentive Match Plans for Employees of Small Employers) and SEPs (Simplified Employee Pensions). Do your research and look at which would be the best plans for you and your business.
Plan Your Will
A tough but necessary scenario to consider is what will happen if you pass away before retirement. If you need to provide for a still-living spouse, an elderly parent, or dependent children, you will need certain provisions in your will to ensure their well-being. If you have built a lucrative, thriving business, you might consider passing the business on to your heirs in your will, so they would benefit from that business in the coming years. An estate planning attorney can help guide you in these matters, since there will be tax implications to consider.
Congratulations on the years of hard work you’ve put into building your small business! Knowing that you are taking the right steps today to put you on the path toward the retirement you deserve will ensure that those Golden Years will be all that you want them to be.