Retirement planning for small business owners
By ATB Financial 8 March 2019 5 min read
If you don't plan on working forever, you'd better find some time to develop a financial plan for retirement.
Many entrepreneurs fall into the pitfall of putting any extra money into growing the business, not personal savings. And there are employees to consider too. You should also consider the options for offering them company RRSP contributions in addition to Canada Pension Plan contributions. Being able to offer this to your employees will enable you to attract and retain quality staff and give you a competitive advantage in the marketplace.
Financial planning: A common challenge for small business owners
“We find that a big challenge small business owners face is actually setting money aside to invest because they tend to reinvest their money back into their business,” said Allan Leung, Compass and Wealth Lead with ATB Investment Management.
“They may not even be paying themselves and might not necessarily have the time to look into financial planning.”
The ATB Business Beat, a quarterly report on the challenges, opportunities and opinions of small and mid-sized businesses in Alberta, conducted a survey on retirement and succession planning. Almost one third (32%) of the small and mid-sized business owners we surveyed are planning to retire within the next five years, and just under half (47%) are planning on selling all or part of their business to help finance the retirement. Despite this, only 27% have a formal personal financial plan for retirement and only 30% have identified a successor for the business.
Here's a 4-point plan to help you.
1. Make time for financial retirement planning
The best way to start planning for your retirement is to actually make time to start planning for your retirement. Make it a priority. There are a lot of options out there and sitting down with a professional financial planner can help you decide what is the best one for you and your future goals. They can help you find a comfortable balance between investing back into your business to help it grow and investing in your own future so you can live the lifestyle you’ve always imagined for your retirement.
“Each individual’s situation is unique and it is important for them to meet regularly with their advisor to review their progress,” said Leung.
“Putting aside money regularly is important to having enough and you should also take advantage of dollar cost averaging. These are things you can discuss with your advisor.”
2. Develop an exit plan: Sell your business to fund retirement
You’re responsible for what happens to your business when you stop running it. If you plan on selling your business to fund your retirement, you’ll have to make sure that it is capable of running without you. Why would anyone want to buy it otherwise? Whether you’re planning on selling it to a family member, third party or employees you will have to create a succession plan so you can successfully pass the torch to the new owner.
More than nine out of 10 (91%) business owners we surveyed regarding succession planning believe that it is important, yet only 58% have a succession plan and of that only 21% have a formal plan. Procrastination seems to be the culprit as to why many of these business owners haven’t made a formal plan. With so much to do actually running the business, planning to pass it over to someone else in the future doesn’t seem to be a priority.
The evolution of a business’ ownership is inevitable, which is why finding the right person to take over and getting sound advice on the merger is critical. Even if you don’t plan on retiring for a very long time, having a sound succession plan in place will make everything go smoothly and successfully when the time comes. A professional, like a banker, accountant or mergers and acquisitions representative, can help you maximize the value of your business and help ensure that your legacy is left in good hands.
Selling a business can be tricky and business owners often solicited the services of a third party, like a mergers and acquisitions representative, to act on their behalf. Not only will a third-party company help you determine what your business is worth, they can also help find and filter interested and qualified buyers.
Obviously, market conditions will determine how much you can sell your business for. The worst thing you can do is wait until the very last minute to try to sell your business. You might start to feel desperate to sell it on the eve of your impending retirement and will miss out on getting top dollar for it.
The earlier you start developing a succession plan, even if you don’t plan on retiring for 20 plus years, the more successful you’ll be when it’s time to pass things off. Create that plan now and re-visit it every few years to make adjustments as necessary.
3. Offer a retirement savings plan to your employees
In addition to paying the employer portion of the Canada Pension Plan, there are some options for small business owners who wish to offer a retirement savings plan for their employees. Many small business owners offer to match RRSP contributions made by their employees up to a certain amount. A business financial advisor can help you determine how much you can afford to match per employee.
Some small businesses will offer to contribute a percentage of each employee’s salary to a retirement savings plan as long as that same amount is contributed by the employee each time. For example, if seven per cent of your employee’s monthly earnings is $280, then they will be able to contribute $560 each month to an RRSP—half coming from your business and half from their own earnings.
If you have a smaller group of employees, you might want to look into benefit plans that include investment contribution packages that are offered by insurance agencies and brokers. This might be the easiest and most cost-effective option for your small business.
4. Remember—one size does not fit all
When it comes to investing, a plan that might work well for one individual might not work well for you and your situation. As a business owner, you actually have more options when it comes to retirement planning compared to someone who is an employee.
You can take a salary and make RRSP contributions. If you find you don’t have a lot of RRSP room, you can maximize your tax free savings account (TFSA). Some business owners choose to pay themselves in dividends, allowing any surplus to stay in the company where it can be invested back in stocks, bonds or growing the business. Then, when you stop working, you can use those investments to fund your retirement.
Diversifying your retirement savings plan is key. It’s important that as a small business owner, you are not putting all your eggs in one basket. Again, the best advice is to make the time to sit down with a financial specialist and get professional guidance on your best options for a retirement savings plan.