Smart Retirement Planning Tips for the Savvy Business Owner

Understandably many business owners are focused on “just getting through the year” right now, while others are thriving, pivoting, and looking only forward to maximize growth from new opportunities. A successful or savvy business owner is always thinking, “What’s next?” It could be as simple as what’s the next opportunity, or what’s the next challenge? After all, it’s been that kind of year!

But the biggest questions like, “What’s next for me? Is retirement an option?” are those that only the smartest, most successful business owners ask of themselves and their financial advisors.

Do you have a business retirement plan?

Creating a comprehensive retirement plan for business owners requires a careful understanding of the unique characteristics of the individual’s needs and goals, their family dynamics, the size, and type of business they operate, and the amount of time prior to retirement.

Some businesses are set up to expand and hire more employees, while others have little desire to expand beyond the owner and family members.

Finally, some businesses are sellable and are designed to provide the owner with a substantial portion of their retirement funding needs, while others are primarily set up to generate regular income throughout the owner’s working life. In the latter situation, the owner is less inclined to depend on the sale of their business to adequately satisfy their financial needs for retirement.

What factors should I consider?

The following are important considerations in the development of a solid, well-designed retirement plan to meet the needs of business owners:

• The size of the business and the number of employees can make some retirement programs undesirable, while others can create a substantial amount of tax-deferred or even tax-free income at retirement. For example, a 401k may be suited to a business that has many employees, while a simple IRA would be better suited to a business with few employees.
• The composition of a closely-held business can provide opportunities not practical or cost effective for owners of a larger business with many employees. For example, the implementation of a Defined Benefit plan can allow the participants to set aside significantly larger amounts of pre-tax contributions that will lower the business owner’s and the business’s taxes. The inability to limit inclusion of the plan for a business with many employees would make the costs prohibitive and dwarf the tax benefits.
• How a business is legally constructed can create both retirement plan benefits, as well as estate planning benefits. For example, a family partnership can allow a business owner to create a private annuity sale, allowing the owner in the family partnership to transfer business ownership without estate tax credit limitations and selling the business over an extended period of time to reduce annual income taxes.
• The type of business, and the industry it is a part of, can be instrumental in determining whether a business is sellable and if it will be able to provide the owner with a sizable portion of their retirement funding. For example, owning a local sandwich shop or delicatessen may provide the owner with adequate income during their working years. But the owner is unlikely to depend on the sale of their store to provide them with sufficient funds for retirement. Whereas, the owner of a mid-size plumbing business has a much better chance of achieving a higher percentage of their retirement funding from the sale of their business.
• The length of time a business owner has prior to retirement can either restrict or allow for a wider number of retirement planning options. A younger business owner in reasonably good health might chose to look at cash value life insurance policies to build tax-free distribution later, instead of tax-deferred income. Additionally, tax considerations at the time of retirement can play a significant role. Tax-deferred income once distributed becomes taxable and can push the taxpayer into a higher tax bracket, whereas tax-free income avoids that problem.

There is lots more to discuss…

Obviously, this list is a very limited discussion of all of the options available. Your goal should be to strategically create a business retirement plan that minimizes taxes, takes advantage of various aspects of the business, the ownership structure, size, and scope of the business, as well as build-in succession and exit planning strategies.

That’s what we work towards with our business owner clients – we call it developing a Business Owner Master Plan. In fact, we’ve written a 17-page white paper about creating such a plan – give us a call at 480-346-1283 and we will email you a PDF.

Finally, your business retirement plan, and your Master Plan if you go that route, must be adaptable to changing circumstances, such as tax rules, economic conditions, technological innovations, family circumstances, owner health, change in time, and emerging opportunities. Remember retirement planning is an ever-changing, on-going activity the requires constant vigilance and maintenance…that’s why we meet with our clients three times a year…not just once.

Contact us

Our passion is helping business owners make their success their legacy. We specialize in working with business owners to create integrated financial plans for your personal life and your business; essentially organizing your complete financial life in one place.

Please reach out to us at 480-346-1283, or email hello@modernizewealth.com if you have any questions, or just want to discuss further.