Retirement Planning for Small Business Owners

Aug 21, 2014 11:22:45 AM / by Jason Shaw

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If you own a small business, chances are that it is tying up the majority of your wealth at the expense of your personal financial security.  That is what a recent survey by CNBC and the Financial Planning Association (FPA) found.  The poll sampled 178 financial advisors across the U.S. who provide services to small business clients aged 35-70 and found that on average, 70% of small business owners’ wealth is invested in their companies.  Many of the advisors expressed that this creates a high degree of financial risk for these business owners and their families.

According to the survey, the greatest financial challenge small business owners face is developing a retirement plan and exit strategy.  Nearly half of the advisors responded that 20% or fewer of these clients have a succession plan in place, although they suggest that a succession plan or exit strategy should be part of a business plan from the beginning because putting a strong plan in place could take several years.  It involves finding and grooming successors as well as keeping the business on a path that maximizes its value for sale.  Having this kind of long-range plan increases a company’s chances of success because it also provides guidance as to how to best manage the business on a day-to-day basis.

The survey also indicated that small business owners typically fail to adequately protect themselves against unanticipated events.  54% of advisors said that they felt their small business clients were insufficiently protected, while only 28% felt these clients were well protected.  Without proper risk protection, a business owner’s premature death or disability can necessitate an immediate emergency sale of the company, which can severely reduce the price the sale is likely to bring.  In order to get a healthy price for a company, the owner must first spend time attending to the factors that increase its value, such as cash flow, debt, and succession.

Advisors implement a variety of insurance products to control risk for their small business clients, including disability insurance, key person insurance, and business interruption insurance.  These types of products can help to mitigate the risk of catastrophic loss in case of unforeseen events.

Aside from developing a plan for your company in your absence, it is also important to provide for your retirement with more than just the value of your business.  A recent Wall Street Journal article states that relying too heavily on the sale of a business and overestimating the value of the company are among the biggest mistakes small business owners make in retirement planning.  At the same time, they tend to underestimate their living costs in retirement, often because they fail to recognize how much of their expenses are currently covered by the business.

The advisors polled by CNBC and the FPA advise greater diversification in retirement planning for small business owners.  They suggest a balance between reinvesting in the business and putting money into other investments.  The more assets you hold outside of your company, the more power you will have to exit the business when and how you wish.  A qualified financial and tax advisor can help you to identify tax-efficient investments to take advantage of any tax benefits that are available to you and make the most of your money.

Boelman Shaw Capital Partners offer business consulting, retirement services, and tax planning and preparation under one roof.  We can help you untangle your business and personal finances to get a clear view of your financial situation and your needs for retirement.  We will also analyze your individual financial picture to find sound, tax-efficient investments for growing your retirement assets.  Contact our Des Moines office today for a free consultation.

Material discussed herein is meant for general illustration and/or informational purposes only.  Because individual situations will vary, the information shared here should be used in conjunction with individual professional advice.

Topics: Financial Planning, Retirement

Written by Jason Shaw