What Small Business Owners Should Know About Preparing For Retirement

BY • POSTED June 25, 2019
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Being a small business owner likely means you are unable to afford the luxury of having a financial expert lay out a retirement plan for you. Not only do you have to do the research to build your own plan yourself, but depending on your business, you also may have to assist in the planning of your employee’s retirement plans. This degree of planning is quite significant.

Comparing retirement plans, estimating current and future values, and calculating how much money to put away each month should be planned out before the process of setting up your retirement even begins. While it can seem daunting, this degree of planning is essential in order to maintain you and your employees’ peace of mind.

This article will dive into both more and less traditional strategies that small business owners should know about preparing for retirement.

Planning is Key

As with anything in business, big decisions should not be postponed until the last possible minute. This often leads to panic in the decision-making process which often leads to disaster down the road. Conduct some research on what the cost of living is expected to be when you retire as well as any medical costs that commonly occur throughout the aging process. If you can do that, you’ll have a much clearer idea of how much would be an optimal amount to save.

One of the bigger mistakes that many people make is underestimating how much the cost of living will be after retirement as well as how much income they expect at retirement. When you can calculate some estimates for the cost-of-living in areas for post-retirement life, be sure to add 10%-20% to that original number. This will add a very necessary cushion. Calculating these estimates can be a tough task, so be sure to take advantage of retirement models to assist with the number crunching side of things.

Set a firm age for retirement as your goal, and the estimated amount of money that represents your savings goal. Through careful planning, you should be able to save enough in order to retire in line with your planned age goal. Market Watch’s Planning Calculator can help you estimate the age you can retire based on your annual savings.

Underestimate the Future Value of your Business

It is difficult to pin down an accurate figure when it comes to the future worth of a business. The market can be volatile and there is no telling how customers will react in the future. Once your business has been around for at least five years, sit down with a financial planner when financially viable to get as accurate of a future company valuation as possible. Being able to do this will assist in your ability to make better decisions concerning both you and the company’s future. 

One of the biggest mistakes people commit when tackling this endeavor on their own is not properly estimating the future value of their company. Most tend to overestimate the value which can throw your entire plan askew. If you underestimate the future value of your business, that might raise the age you are able to retire, especially if you raise the expected value of how much money you need to retire. However, this also makes it easier to meet the goals, meaning that you might be able to retire earlier than expected. It’s better to retire later with more money than you need than retire early with less money than you need.

Today’s Business Choices Shape Knowledge of Exit Strategies

Whether or not you plan on selling your business, it is extremely beneficial to have exit strategies in place for various situations. In fact, it’s essential to plan for the possibility that the business is worth less than expected or you don’t sell it to a third-party.

Some plan on selling their business when retiring as it’s their largest asset. You can also use a traditional 401k, IRA, etc. as additional sources of income aside from the liquidation of the business. As the old saying goes, don’t put all your eggs in one basket. The same goes for savings and investing for retirement: put your money into different baskets.

Here are some exit strategy options to prepare for:

  • Liquidating the business – Use if you want the business itself to fund your retirement. Note: If you decide to consider selling your business at the last minute, it can be viewed as a panic sale which will negatively impact the overall value of the business.
  • Health issues forcing an early retirement – Have money set aside for this possibility.
  • Passing the business down to a family member – If you don’t want to close the business or you don’t need to liquidate the business to fund retirement, this can be the way to go if you want to keep the business going.
  • Getting bought out – This is an option if you have a business partner or someone who wants to buy the business from you. This can be another way of funding your retirement if you want to avoid liquidating the business.

Planning requires flexibility. The market fluctuates so you must plan for not only the best possibility of a strong market when you retire, but also consider working longer if a recession hurts the value of the company. If a recession is looming, but the effects haven’t been felt yet and you are worried about how long the recession would impact the future market, you could consider retiring early. Keeping abreast of future trends and planning for multiple possibilities will make the decision-making process much less stressful.

No matter what the plan is, you should always have exit strategies on the table for the myriad of scenarios that can arise when owning a business. This will help you make informed decisions on important matters, both urgent ones and less-urgent ones.

Planning is the key, and for certain things such as the future value of the market, it is wise to consult a financial planning expert. You can’t be completely certain about everything, but a financial expert can help you make a well-informed decision.

Don’t forget to consider traditional retirement plans such as a 401k or investments in stocks and bonds in addition to funding your retirement through liquidating your business. This will help add flexibility, which is another key to planning your retirement. The more options you have, the more flexible you can be.

Author Bio:

The above article, “What Small Business Owners Should Know About Preparing For Retirement” was written by Matt Edstrom, Chief Marketing Officer of GoodLife Home Loans. Matt completed his undergrad in Chemical Engineering at MIT and earned his MBA from Northwestern University’s Kellogg School of Management. He’s been responsible for starting and managing several brands, including his most recent endeavor, GoodLife Home Loans. Matt is an expert in finance, human resources, and business development.

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