Business owners could be gambling with their retirement

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For business owners, planning for retirement has a different twist. Too many are likely depending on the sale of their business to fund their retirement and the lifestyle they have become accustomed to. Unfortunately, this could be the common mistake of having too many eggs in one basket.

For our business owner clients we recommend that they plan for retirement just like their employees. Invest in your own company’s 401(k) plan and it may also make sense to install a profit sharing component to allow contributions over and above the allowable contribution limit. Also, invest substantial assets in a personal portfolio. If you have built a successful business, you are likely generating a considerable income. Too many times we see this “excess” income plowed back into the business. While we understand this may be necessary to fund the business’ growth, we highly recommend that some of this be used to build a personal portfolio. The goal is to build a personal portfolio that could fund your retirement without depending on the eventual sale of the business.

We don’t completely ignore the projected windfall from the business sale in the financial plans we create. However, we don’t want clients to depend on this liquidity event to fund their entire retirement. There are various reasons why:

  1. Often times the business you developed and cultivated has a personal price tag that might not be achievable at sale. Business owners tend to over-value their business due to an emotional connection.
  2. Today’s economy and marketplace are volatile. A successful business today could be in trouble tomorrow. Simply put, putting all your eggs is one basket is never a good idea.

When the eventual sale does occur, the proceeds can be deposited into the personal portfolio that we have already structured. We have pre-determined the asset allocation and how that money is going to be diversified. We don’t need to reinvent the wheel; we just need to plan to incorporate that money into the already established personal portfolio.

As a business owner it’s easy to pump money into your company and assume that it will provide you a secure retirement upon sale. But, taking a disciplined and prepared approach to planning will ensure that you aren’t gambling with you and your family’s future.

Stay tuned for a follow-up post offering advice to business owners who are planning a family succession.

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