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Thayer Partners Blog

Why Business Owners Should Start Planning for Retirement Early

[fa icon="calendar"] Jan 15, 2016 9:00:00 AM / by Chris Wilmerding

Chris Wilmerding

Why_Business_Owners_Should_Start_Planning_for_Retirement_Early.jpgIt’s never too early to start planning for the day you retire. In fact, the earlier the better. Though planning for retirement might be the last thing on your mind if you’re a young entrepreneur or a seasoned business owner with your hands full trying to build and grow your business, you should make the time for it. Doing so will allow you to build a solid and realistic retirement plan, so you don’t run out of money once you retire. Even if cash flow is an issue right now, having an accurate idea of your company’s current and potential value, as well as strategies to turbo charge your retirement, will give you peace of mind and give you a better chance of achieving your goals (because you actually have goals).

Here are some of the considerations that you should take into account early on in your planning.

Develop an Exit Strategy

It’s never too early to start planning the sale of your business. Even though you put your blood, sweat, and tears into your company, some day, you probably plan to sell it in order to fund your retirement. It’s likely your biggest asset or will be shortly, and you’re going to want to get the best sale price possible.

But have you developed an exit strategy? Do you have satisfactory answers to these key questions: Have you ever done a business valuation? Who could run the company, besides you? Who would have the money to purchase it from you? Should it be a partner, a competitor, an employee, or a relative? Do you want to continue to have a stake in the business or sell it off completely? A buy-sell agreement can help you address all of these questions.  

If you wait until the last minute to plan your exit strategy as too many business owners do, you might not be able to sell your company at a value you need or want—or you might even force yourself into a distressed sale, which would be a disappointing end to what could have been the high point of your career.

Use your Business’s Profits to Fund Your Retirement Plan

To ensure that you’re as financially comfortable as possible when you retire, you should contribute money to a retirement plan while you run and grow your business. Since the sale value of your business can vary widely depending on market and industry conditions and how many buyers you have interested, it would be wise to have a retirement nest egg already in place.

You can establish a SIMPLE IRA, which is a savings incentive match plan that allows you and your employees to choose which investments to make among those allowed by the financial institution. You would pay taxes on the distribution upon withdrawal. Your contributions to your employees’ accounts are tax deductible.

A simplified employee pension (SEP) IRA is another type of retirement account that allows employees to make pretax contributions up to 25% of their income. Almost any business owner can set up a SEP—no matter the type of company you own or how many employees you have on staff. You aren’t locked in to making any contribution if you’ve had a bad year. A SEP plan offers more flexibility and allows for larger contributions.

If you have several employees, offer a 401K plan and start contributing the maximum allowed (currently $18,000 per year plus $6000 as a catch up if you’re 50 plus).  Or, if you are the only employee, you could start an individual 401K, which is, as the name suggests, a 401K for individuals (and business partner spouses). Consider also an individual 401K paired with a defined benefit plan (AKA a traditional pension plan) if you want to put away a substantial amount of money—in excess of $200,000 per year.

The point is—you would be wise to use some of your company’s profits to fund a retirement plan in case the sale proceeds from your company fall short of your expectations.

Be Prepared

There’s nothing wrong with wanting to run your business until the day you die or selling it for a specific number you have in mind. But you need to plan for all eventualities and have a well-prepared exit plan in place. Maybe you work until the end of your life, healthy as an ox to the last day just as you planned. Or maybe you sell your business on the terms that you set and ride off into the retirement sunset.

But life is full of unexpected twists and turns that even the best exit plan will not address, and the wise business owner does not rely solely on the sale of his business to fund retirement. Rather, he diversifies his retirement assets by contributing money into a retirement plan while he is running and growing his business. 

Learn about your options, set up a savings plan that works for you, and start putting money aside for your future retirement. Consult with a financial advisor, so you can sit down and figure out which plan is best for you and exactly how much you should be saving to meet your goals.

 Avoid Running Out Of Money At Retirement


Topics: Retirement

Chris Wilmerding

Written by Chris Wilmerding

Chris Wilmerding is Principal of Thayer Partners, an independent investment management firm located in Westwood, MA providing financial planning and wealth management counsel to individuals and their families.

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