July 26, 2018

How to plan for retirement as a small business owner

A woman sits at a desk and looks into the near distance, thinking. A woman sits at a desk and looks into the near distance, thinking.

If you’re an entrepreneur, you’re probably focused on the day-to-day tasks involved in running your business.  You may not have considered retirement – even if it’s just a few years away. But don’t worry, you’re not alone. More than three quarters of small business owners don’t have retirement plans in place for themselves or their employees.1

Some working Canadians have company pensions or an employer-matching program to help fund their retirement, luxuries a small business owner doesn’t enjoy. It’s up to you to plan your future and determine how to pay for your own retirement. Below are some questions you might want to ask as you embark on the process of planning.

When would you like to retire?

This is a great place to begin your planning. Even if you settle on a rough idea of a target retirement date, it provides a goal to work towards. It forces you to think about how long you want to continue working, what you would like to do during your retirement, and how much money you are able to save in the years you are still working and earning money.

You’ll need to consider several factors, including your physical and financial health, to decide what date is best for you, your family and any others with whom you plan to share your retirement years.

What sort of lifestyle do you want in retirement?

Your lifestyle plans will help determine how much money you’ll need to enjoy retirement. Think about how often you’d like to travel, whether you want to volunteer or spend your days at home. Conversely, retirement doesn’t necessarily mean leaving work altogether. It could mean assuming less responsibility, working part-time, or consulting while your successor learns the ropes.

How will you fund your retirement?

The good news is that there are several options available to help you fund your retirement. Government programs available to almost all Canadians, such as the Canada Pension Plan and Old Age Security, help provide a basic level of income. And during your working years, the Registered Retirement Savings Plan and Tax-Free Savings Accounts provide a tax-advantaged incentive for you to save money for retirement.

Other options for business owners funding their own retirement include the Individual Pension Plan and Retirement Compensation Arrangements.

Business owners may plan to fund their retirement by selling their business. However, this can be a risky strategy because there are several unknowns. An important consideration is whether you’ll have a buyer ready when you want to sell. You should have your business’s fair market value evaluated before seeking potential buyers.

How you will fund your retirement involves a lot of big decisions. You should speak to your advisor about how you can diversify your sources of retirement income.

What kind of future do you want for your business?

Every owner will walk away from their business at some point. Establishing a succession plan is an important step on the road to a healthy retirement and protecting your legacy.

Here are some scenarios to consider:

  • Transfer or sell the business to a family member
  • Sell the business to a partner or employee
  • Sell to a third party

Even if you know who’s going to take over your business, you’ll need time – perhaps several years – to prepare them to run the operations. They may need to acquire specific skills and relationships, and learn all aspects of the business.

You shouldn’t be alone in answering these questions: your advisor, accountant, and lawyer can all help you plan, from estate planning, and tax efficient investments, to retirement savings plans.

While planning for retirement can seem like a daunting job, knowing you’re prepared for different scenarios can help you relax and focus on your business. Even if your exit plan remains far off in the future, having a plan in place means you’re prepared for every contingency. That’s just good business sense.

This is the first of a series of articles on retirement topics for small business owners. Stay tuned for our look at succession planning next.

1 . Government of Canada. Key Small Business Statistics – June 2016. http://www.ic.gc.ca/eic/siTe/061.nsf/eng/h_03018.html

 

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