What are the steps I can take when planning for retirement as a small business owner? How can I successfully move through the process of retiring as a small business owner? Do I need to figure out my will and end of life wishes when retiring as a small business owner? Where should I be financial if I want to retire as a small business owner?
When retiring as a small business owner (aka self-employed), there are various options you can take and it’s important to choose what works best for your situation. Self-employment gives you some freedom, however planning for retirement is definitely not the time to start saving…that must be done way before thinking about retirement. There is a chance you will have various opportunities regarding how you handle your retirement that give you some flexibility and it’s important to take advantage of them.
Create Financial Goals
Before retiring, carve out some time each day and create a cohesive financial plan. If you put time into this each day you will be ahead of the game. Figure out how much you will need and assess your financial situation. One of the biggest mistakes a small business owner can make when preparing for retirement is overestimating the value of their business. You can’t expect to rely solely on the sale of your business to fund your long retirement and could present a plethora of problems in your future. When your business matures and continues to change in order to keep up with client needs, you are also potentially decreasing your client base. If your clients are an older demographic, they might not be attractive to a brand-new buyer or a refurbish of your business. Likewise, if the success of your business lies in part with your personal customer relationships, when you leave the business, it can decrease the value. A simple retirement model can provide you with a well thought out plan and savings. It’s fairly typical to make the mistake of underestimating the cost of future living expenses and overestimating the cost of future static income. Running the actual numbers on basic retirement models can help you see if you’re in the right playing field. Make certain you have fully predicted the extra sources of your retirement income.
Ask yourself if you plan to relocate once retired, and if so, figure out the cost of living in this new area. You’ll need to account for both increased cost of living as you age, and the added expense of potential health issues. The age you plan on retiring will also have an effect, so make you know how much you need to save each month to make your retirement dreams a reality. These factors come into play when conducting a business valuation or estimating the future salability of your small business. Obtaining a comprehensive business valuation by a certified financial planner that is trained to consider these factors, as well as market projections and changes, is a worthwhile venture when planning for retirement.
On a positive note, small business owners have additional options available to them over traditional employees. One of these options is the flexibility of the date of your retirement. You may choose to retire early, and it’s up to you to determine exactly when to stop working. Also, there are different options for where your money goes. Consider a regular or Roth Independent Retirement Account (IRA). There are also Savings Incentive Match Plans for Employees of Small Employers (SIMPLES) and Simplified Employee Pensions (SEP). Do as much research as possible and find out which would be the best plans for you and your business.
Consider All Assets
Now that you’ve answered basic questions to guide you through your retirement as a small business owner, looked at what your business is worth, and created an advanced plan the next step is to consider other assets and investments. Know what income your investments need to produce as part of your retirement plan and adjust your investments accordingly to meet those needs. This might be another time where it would be productive to work with a financial planner, so you can best maximize your future income.
One important factor to consider is what will happen to your business when you retire. Will you pass it on to the family or sell the company to another business or owner? Will you have a colleague or other business partner take over and buy out your interests? Knowing your future exit strategy can help guide today’s important business decisions. If you do plan on selling your business, The U.S. Small Business Administration suggests taking one of the following approaches:
- Income approach. It looks at projected revenue and accounts for potential risks.
- Market approach. Compares your business to other similar businesses that have recently sold.
- Asset approach. Subtracts total business liabilities from the total value of all assets.
Progressive and attentive planning can ensure that you are covering all of the bases. Use a business valuation to set a financial value before marketing to potential buyers. Consider taking a self-evaluation and seek out a qualified business appraiser. Accurately value all property and real estate that is connected to your business and includes assets such as branding presence, intellectual property, customer information, and projection of future revenue. When you’re figuring out how much your business is worth, consider these common valuation methods.
Write a Will
A hard but necessary situation to consider is what would happen if you pass away before retirement. If you need to provide for a loving spouse, an elderly parent, or dependent children, you will need certain provisions in your will to ensure their well-being. If you have built a successful business, you might consider passing the business on to your heirs in your will, so they would benefit from that business in the coming years. An estate planning attorney can help guide you with these matters since there will be tax implications to consider.
Congratulate yourself on all of the years of hard work you’ve put into building your small business. Just knowing that you are taking all necessary steps today to put you on the path toward the retirement you deserve.
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