Business Owner’s Retirement Guide

Business Owner’s Retirement Guide

Recent volatility in financial markets has made planning for retirement as challenging as it’s ever been. In addition to calculating how much an individual must set aside to build up an adequate retirement nest egg, the question of how best to invest those funds becomes a much more challenging feat in volatile times.

For business owners, retirement planning can prove even more complex. Often, the inherent value of a business may provide a substantial portion of its owner’s retirement assets. Is this wise? Or is it more prudent to instead diversify, and set aside funds in unrelated investments?

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Chapter 1

How business owners plan for retirement

In many cases, business owners count on the inherent value of their business to fund their retirement. As such, they are often less focused on setting aside funds in retirement accounts such as SEP-IRAs and 401ks. Given the amount of time and energy business owners spend building their companies, it is certainly understandable that they would look to their business as a source of retirement income. In some cases, they may plan to fund their retirement by selling a portion of their business, often to a family member or friend who will take over the running of the business. In other cases, if none of their family members want to take over the business, they may be more inclined to sell the entire business when they retire. 

A study (1) by the SBA found that owners of small businesses over age 50 are significantly less likely to have solidified their retirement planning as compared with employees of larger companies. The study also reported that small business owners retired later than average, with some not retiring at all. Another recent study showed that 34% of entrepreneurs had no retirement plan at all. (2) 

Given the tremendous amount of time and effort involved in running a business, whether small or large, it may be challenging for business owners to adequately prepare for retirement. However, being absorbed with running a business is not a good reason in and of itself to avoid planning for retirement. Setting up a long-term retirement plan is just as important for business owners as for anyone else.

In fact, retirement planning could be said to be especially important for business owners given that they are often heavily invested in their own company. As a result, wealth diversification via funding non-correlated retirement accounts can help reduce the risk of having all their eggs in one basket.  

For some business owners, the issue is not whether they would like to contribute to outside retirement accounts, but to what extent they are able to. The cash flow demands of running a business are, in some cases, substantial. However, when reinvesting in a business ties up an outsized portion of one’s net worth, it may be time to ponder whether taking such an approach is a prudent long-term strategy.  

Another reason business owners may not have established significant outside retirement plans for themselves is that, unlike people who work at large corporations, they don’t have the luxury of having such a plan automatically available to them. They have to take the initiative to set up a plan, either by themselves or by working with a financial advisor. Given how important it is to prepare in advance for retirement, this raises the question as to what type of planning business owners should do to secure the retirement of their choice. Do they need to draw up a detailed plan or should they just rely on their business instead?

Read our blog article: How Small Businesses are Reinventing Themselves

Chapter 2

Do you need a Plan? How to identify if you need one

Business owners should approach this transition like any other retiree – they will need a sufficient income stream to meet their expected expenses. But is a full-blown retirement plan necessary? 

Perhaps the most significant issue that a business owner should consider is how much to rely on the business as a source of retirement income, regardless of a sale. If it appears as though the business is not able to fund an ongoing retirement, a financial plan may be needed. 

An owner should ask himself the following questions about his business.

  • Is the business reliant on the owner’s presence for continued success?
  • How easy would it be to sell the business?
  • How closely is the value of the business linked to cyclical trends?

In cases where an owner’s presence is necessary for success, it may be difficult to value the business. As such, a sale at full value may prove challenging or impossible. In this situation, it may make sense to utilize ongoing profits from the business for retirement account funding.

Another factor that owners should consider is how difficult it will be to sell the business.  It’s important to think through an ideal sale scenario. Some may wish to completely walk away from the business, leaving a management team and new owners in total control.  Some owners do stick around post-sale as an employee. They may accept a salary and function in a transition-style role to set those impacted by the sale at ease. Still, some former owners are a “face” of the business. They may lend their image and likeness to the brand, and continue to work in a marketing role. A business owner needs to first gain a sense of his post-sale employment, and then he or she can quantify how much the business will influence his retirement plans. 

An additional consideration may be an owner’s health. A report from the Employee Benefit Research Institute (3) found that 55% of the retirees surveyed who had retired earlier than scheduled had made the decision to alter their plans due to either health issues or disability. If retiring earlier than expected would significantly impact the value of the business, an owner should seriously consider working on a retirement plan that accounts for the potential of such an occurrence. 

Besides looking at the retirement income gained from a business, this report has identified a few other factors to take into account: 

Check the numbers: As a first step, it’s recommended to quantify how much retirement income is needed and then look at the income sources lined up to meet those expenses. If income doesn’t match or exceed the expenses, it indicates that serious retirement planning is probably needed. The same would apply to someone who is  unsure of retirement income streams or potential future expenses (like an extended healthcare stay.)

Many questions should be asked when creating a retirement plan, whether completed by a retiree or a professional financial planner. These include:

  • Is projected retirement housing expense realistic? Especially for those desiring a relocation, is the cost of living understood?
  • How reliable are retirement income sources? How certain is a projected business sale price (after expenses, taxes, other obligations, etc)?
  • Have longer-term costs, like an extended health care need, been evaluated?
  • Has the plan been stress-tested against varying market conditions and inflation?
  • Is a projected retirement age realistic?
  • Does a business exit strategy exist? What happens to the retirement plan if health issues arise, or business transition plans falter?
  • Has the business been realistically appraised?  It can be helpful to bring in outside experts to perform the task. A major mistake that can befall business owners is overestimating how much their business will be worth when they are ready to sell it.
  • It is also important to review other assets and how they are invested. Sometimes business owners are so focused on their own company that they don’t take the time to optimize their outside investment strategy.

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Read our blog article: 

The Small Business Owner’s Guide to Surviving the Pandemic



Chapter 3

Types of retirement plans for business including succession plans

When planning for retirement, business owners have a wide variety of retirement plan options. These plans typically enable the purchase of an assortment of investment vehicles and asset classes. As well, retirement plans may provide tax savings opportunities. A financial advisor can give advice as to which type of plan is likely to work best. The following are some of the retirement plans most commonly used by business owners:  retirement planning words written in a notebook

SEP-IRA: These tax-deductible plans are similar to traditional IRAs but allow for larger contributions, up to 25% of net business income per year or a max of $57,000. Please note that if the business has employees, the business owner must typically also fund a SEP account for them. 

SIMPLE-IRA: These retirement plans are aimed at businesses with 100 or fewer employees. The maximum contribution for 2020 is $13,500 for those under 50, or $16,500 for those 50 and older. Employee contributions are made on a before-tax basis and withdrawn directly from an employee’s pay, as with a 401k. The employer must either match employee contributions up to a maximum 3% of salary or contribute 2% of employees’ salaries with a maximum contribution of $5,700.  

Solo 401k: These plans are for self-employed individuals (and their spouses). They allow  for a  contribution on a pre-tax basis for as much as 25% of the business owners compensation along with an employee’s contribution up to a max of $57,000 or $63,500 (if you are 50 or older). If the business owner’s spouse also works at the company, they can make contributions subject to the same limitations. As with a normal 401k, contributions are tax-deductible unless you choose a Roth account. In that case, contributions are not pre-tax, but business owners will pay no taxes when they withdraw funds from the account.

SIMPLE 401k: This plan is targeted at businesses with 100 or fewer employees. Business owners, along with their employees, can contribute as much as $13,500 in 2020 ($16,500 for those 50 or older). It is also possible to borrow against the funds in a SIMPLE 401k account and take withdrawals due to financial hardship free of penalties.

Chapter 4

Succession Planning

For many business owners, planning for a time when they are no longer working at, or at least actively running, their business is important not just to the continued success of the business, but also to its potential impact on their retirement. Many business owners will either sell a portion of their business when they retire or plan to receive payments from the business to support them in retirement. In either case, a smooth transition to new management at the company is essential. It will both increase the likelihood that the ownership share of the company will retain or increase its value and that the business owner will receive the expected amount of income from the business even after they leave the company. To improve the chances of a seamless transition, a business owner may want to draw up a succession plan that outlines how the business will be run when they have left the company or scaled back their activity. The plan should take into account feedback from everyone who will continue to have a stake in the business, including family members and any other co-owners. 

Chapter 5

Tax implications

For many people, tax rates drop in retirement. For business owners, however, if the business is sold to fund their retirement, it is possible that taxes can take a big chunk out of their proceeds. Additionally, if they have set aside funds in retirement accounts, it is important to consider the tax implications of withdrawing money from tax-deferred accounts. In either case, preparing a strategy beforehand is crucial to optimize the results.  clock representing tax time

It is also important to consider how retirement will affect the use of tax breaks as a business owner. Using a home office or company car are just two of the deductions that can be used to reduce  taxes while owning a business. Once the business is sold, or the owner is no longer actively running it, these deductions may no longer apply. Thus, it is important to take this into account when budgeting for retirement.  

Another tax-related issue to consider in retirement planning is local tax policies. If a small business owner is considering  moving to another state or area within their state, they may want to make sure they are aware of changes in daily expenses they may incur. Of course, state and local income taxes are a major expense that may go up or down. Some states don’t charge income taxes, while others have different levels of sales tax. Some cities charge local income taxes, although most do not. It’s important to evaluate all costs of living associated with relocation; just because taxes may be lower does not mean that daily costs of living will be. These differences can impact  retirement income and expenses, so be sure to take them into consideration while creating retirement budgeting plans. 

Selling a business: To avoid a huge one-time tax hit, business owners can structure the sale of a business to stretch out the taxes. This can be done by taking payments over a few years in the form of an installment sale. They may also be eligible for the qualified small business stock exception. Other techniques to consider are converting from a C corp to an S corp prior to the sale and deferring taxes via setting up an ESOP (employee stock ownership) plan.

Optimizing Retirement Income Withdrawals: To maximize the growth of retirement funds, small business owners may want to consider withdrawing non-tax-advantaged funds before tax-deferred funds. Additionally, if funds are in Roth IRAs, they can be withdrawn free of taxes, so it may make sense to withdraw funds from these accounts prior to taxable withdrawals.  

Chapter 6

Managing Debt

Many business owners use debt to help grow their business. However, in retirement, it is generally best to pay off or reduce your debt as much as possible. Debt can be used productively to help a business grow or early in a person’s career when their income is rising. For instance, for buying a house, car or other major purchase. As a person moves into retirement, however, debt is typically less useful. Because business owners don’t have as much time to pay off debt, taking on new debt obligations is generally not recommended. Additionally, in retirement years, business owners are not likely to have the same ability to increase their income as earlier in their career.  

Thus, a business owner’s retirement plan should incorporate a debt management plan that reduces their debt level over time so that when they enter retirement it doesn’t impede their ability to live the lifestyle they want to live. This can involve planning to make regular payments until the debt is extinguished or to save up, or invest, funds with the goal of paying off the debt prior to retirement. 

To accomplish this, draw up a list of debt obligations and then rank them by interest rate. Whenever possible, make a point of paying down high-interest-rate loans first. Try to plan far enough in advance so that by the time retirement is reached, the debt is paid off – or at least all of the debt that carries a high rate of interest.

Chapter 7

How a financial advisory firm can help

Given the multiple factors involved in planning for retirement, keeping track of all the options available can be a challenge. This is especially true for business owners who, in addition to traditional financial planning options, also have to take into account a variety of considerations related to how their business can help them achieve a comfortable retirement. bullseye target representing the right path towards retirement planning

A financial advisory firm, such as Prism Planning Partners, can offer the counseling and resources necessary to help make sense of the various options available to business owners as they build and implement their retirement plan. This includes not only helping with decisions about which retirement plan type best suits their financial situation, but also helping them select and manage an investment portfolio in accordance with their financial goals. 

Working with a financial advisory firm will typically provide access to the retirement planning software used by the firm’s advisors. This type of software can provide visualizations of various retirement scenarios based on the business owner’s input. For instance, in one scenario, the app might show the differences in expected retirement income if the retirement age is at 61 or 67 – or any other age.  

Besides access to advanced retirement planning software, a financial advisor also has the training and experience to help invest savings in a portfolio designed to help achieve a business owner’s financial objectives. This involves taking into consideration their financial goals, time horizon, and risk tolerance. When doing so, many advisors will use Modern Portfolio Theory (MPT), which focuses on using diversification to build a portfolio intended to offer the highest rate of return possible for a given level of risk based on historical asset performance. 

A financial advisory firm can also help business owners overcome the temptation to invest every extra dollar they make back into their business. While there are certainly times during which a business will require heavy reinvestment of profits, to properly diversify business owners should be prepared to at some point use the cash generated by their business to set aside retirement funds in outside accounts. Working with a financial advisor to help them develop a strategy to invest their outside funds can help them overcome any reluctance they may have to invest outside of their own company.

Chapter 8

How to locate a financial planner for the job in Libertyville IL

When seeking a financial planner in Libertyville, IL there are a variety of factors to consider. These include:

  • Qualifications: When looking for tailored financial advice, a  CERTIFIED FINANCIAL PLANNER ™ designation indicates that a planner has passed the comprehensive CFP® Certification Examination. The examination includes case studies and client scenarios designed to test one’s ability to correctly diagnose financial planning issues and apply one’s knowledge of financial planning to real-world circumstances. Also, CFP® professionals agree to be bound by the CFP® Board’s Standard of Professional Conduct. The Standards prominently require that CFP® professionals provide financial planning at a fiduciary standard of care. This means CFP® professionals must provide financial planning services in the best interest of their clients. Additionally, for expert tax advice look for an advisor who has qualified for the CPA designation.
  • Location: Looking for a financial advisor from the area makes sense because he/she may be more familiar with the local taxes, retirement plans and financial conditions in Libertyville Illinois. 
  • Resources: Verify that a financial advisor has access to the financial instruments and technology necessary to provide comprehensive advice and investment services.
  • How are they compensated: Financial advisors typically bill on a fee basis, whether on an hourly basis, a retainer fee, or as a percentage of assets under management. There should be complete transparency and disclosure of any conflicts of interest in compensation.
Chapter 9

Planning for Peace of Mind

While retirement planning for business owners can be a complicated process, it doesn’t have to be an intimidating one. Whether deciding to handle the process themselves or retaining an advisory firm to assist, there are significant resources they can access to help find the approach that is right.

The steps outlined in this guide can provide business owner’s with a roadmap for integrating plans for monetizing their business to fund their retirement with setting up outside retirement accounts – reducing the risk of leaving their retirement solely dependent on their business. By taking a diversified approach to retirement planning, business owner’s can run their business with the peace of mind that comes from knowing that its success won’t be the only factor in determining when, and if, they can retire.

At Prism Planning Partners, a registered investment advisor, we are dedicated to serving our clients at every stage of their lives. Whether near retirement, or just starting to plan, or someplace in-between we can help illuminate the possibilities available. Contact us today for a consultation.

(1) Tami Gurley-Calvez, Kandice Kapinos, and Donald Bruce, December 2012 Retirement, Recessions And Older Small Business Owners
(2) Abigail Summerville PUBLISHED THU, JUL 27 2017 Survey: 34% of entrepreneurs lack retirement savings plan
(3) Employee Benefit Research Institute: 2019 Retirement Confidence Survey Summary Report April 23, 2019

Prism Planning Partners, LLC dba Prism Planning Partners is a Registered Investment Adviser. This article was produced by Paladin Digital Marketing, an entity unrelated to Prism Planning Partners and may not necessarily reflect the expertise of this financial advisor. This publication is not intended to provide investment advice and is intended for your information only. Opinions and forward-looking statements expressed are subject to change without notice. Information based upon third-party sources and data are believed to be accurate and reliable, but we do not warrant or guarantee the timeliness or accuracy of this information. All domestic and international rights are reserved. No part of this publication including text, graphics, et al, may be reproduced or copied in any format, electronic, print, et al, without written consent from Prism Planning Partners. Neither Prism Planning Partners, nor its investment advisor representatives provide legal or tax advice. Please be advised to consult your investment advisor, attorney or tax professional before making any investment decisions.