Balance business succession with retirement planning
While small-business owners feel confident running their businesses, many are unprepared for retirement.
Owners are focused on the day-to-day challenges and demands of running a business, so succession and retirement planning often get put on the back burner. To retire comfortably, owners need to prepare for the long term, the same way they plan for everyday business needs.
It’s a balancing act to determine how much to invest in the business to help it grow and how much to put aside for retirement. If given the opportunity to invest a large sum, many business owners may choose to put the money into the business as opposed to their retirement. So how can small-business owners get a handle on retirement savings?
Preparation and pre-planning are extremely important. One of the main reasons business owners avoid setting up a retirement plan is time, or, more specifically, a lack of time. They believe that once the business is up and running, they’ll have more time to focus on retirement savings. However, by the time they start planning for retirement, they will have lost decades of potential savings.
For example, if you put away $10,000 today and that grows by 6 percent annually, in 30 years you would have around $57,400. But if you wait 10 years to invest $10,000 and it grows by 6 percent annually, you would only have $32,000 in savings. The difference in savings significantly impacts lifestyle in retirement, so it is better to start early with any amount possible, rather than waiting until later to save.
As business owners approach retirement age, they may plan to use their share in the business as a retirement strategy. However, to live comfortably, owners will need to make sure they have an accurate idea of the business valuation from the prospective buyer’s viewpoint. A business owner I worked with planned to sell his business and put the money towards retirement, but was told the business was valued much lower than he estimated. This was because much of the business’s value was tied to his involvement.
Setting up a retirement plan early on can prevent owners from needing to depend heavily on the business for future savings. In addition to the personal benefits a business owner gains from a retirement plan, it also benefits employees. Retirement plans can be used to attract and retain employees, which may decrease new employee training costs.
It can be intimidating to think about the time it takes to research and select a retirement plan. And while there is some time expenditure, small-business owners can work with their financial adviser and certified public accountant to determine which type of plan makes the most sense for their business. From there, a financial adviser can take over a lot of the administration work, help establish the retirement accounts, and complete the paperwork for the enrollment plan and employees.
Some of the most common retirement plans that small-business owners establish are Simplified Employee Pensions, or SEPs; Savings Incentive Match Plans for Employees, or SIMPLEs; or a 401(k). Have human resources staff evaluate the pros and cons for each of these plans. Everyone’s situation will be different, so business owners should work directly with their CPAs and financial advisers to determine the best fit. The plan that is best for the business will depend on the number of employees, the complexity of administration, goals for the owner and employees, and expected growth over time. It’s important to evaluate each plan carefully, because it can be difficult to make a change later on.
Another essential piece of an owner’s retirement is developing a business succession and contingency plan. As an owners near retirement, they will need to decide who will take over their roles. Will they hand the reins to a key employee or family member, or will they sell the business? Similar to retirement planning, owners should think about succession planning years in advance. After putting their heart and soul into the business, it’s important to make sure that it is taken care of and continues to thrive after they retire.
Brooke S. Petersen is an investment consultant for individual investors and an investment adviser representative for Conrad Siegel Investment Advisors, Inc., based in Susquehanna Township, Dauphin County.