Retirement Planning for Business Owners

Key Takeaways

• The vast majority of family businesses on the market don't sell and seven out of ten fail to transfer to the next generation. Put the odds in your favor with a comprehensive exit plan.

• Proper financial planning, understanding "walkaway money," and preparing for a business transition are key to securing a stable retirement and financial future.

• Make sure all of the advisors assisting you are fiduciaries who are legally required to put your best interests ahead of their own.

As a business owner, choosing the right retirement plan is essential for securing your future and your employees’ financial futures as well. Whether you're a solo entrepreneur or run a business with many employees, there’s a retirement plan that can suit your needs. From the flexibility of a SEP IRA or Solo 401(k) to the high contribution potential ($250,000+ per year) of a defined benefit plan, the key is to find the right fit for your business structure, profitability, and long-term goals. There may be plans that can effectively use life insurance, but they are not typically the first choice.

By establishing the right retirement plan today, you’re not only setting yourself up for a more secure future but taking a crucial step toward building overall wealth outside of your business. That’s important because so many successful business owners we work with have way too much of their net worth tied up in their businesses and aren’t able to unlock it.

Real World Example

Recently I met with the owner of a large regional commercial cleaning company with many employees. The owner has done an amazing job growing the company and making it highly profitable. But like many owners, his finely honed operational skills didn’t translate into smart investment planning or post-exit retirement planning.

Like many owners, he was wealthy on paper but didn’t have much liquidity, so cash remained tight. Like many of his peers, he purchased a whole life insurance policy and was paying a monthly premium of $2,000 ($24,000 per year). That policy might have made sense if his other planning was in order. But he already had lots of other life insurance, and he had minimal investment savings due to the cash flow needs of business, his personal lifestyle and his 9% Small Business Administration loan.

I politely explained that he could have taken that $2,000 monthly insurance premium and put it into savings by switching to a less expensive term-life policy. He countered by saying the life insurance salesperson told him his policy would function the same as a Roth IRA. He was overlooking the fact that Roth IRA contribution limits are only $7,000 a year ($8,000 if over 50) – not $24,000. So, I explained he could instead do a Roth for himself, a Roth for his spouse, and contribute more to an after-tax account or to 529 college savings account for his two daughters.

It doesn’t sound like the insurance salesperson suggested any of these options, nor did his accountant. The options I recommended can be highly effective, but don’t offer much commission potential for the insurance salesperson. People. Meanwhile, his accountant – a classic “financial historian” – felt my suggestions were too forward looking. Yes, accountants can set up businesses to sell investment products through turnkey asset management platforms (TAMPs), but like the insurance pro, very few have taken the oath to work in a fiduciary manner.

Quite simply, a fiduciary is an advisor who must always put their client’s best interest ahead of their own – it’s a legal requirement. To see if your advisor (or potential advisor) is a fiduciary, visit NAPFA (National Association of Personal Financial Advisors). This organization requires each member to take a fiduciary oath to work in your best interest. If they’re members you can sleep well at night knowing you will have a trusted partner to guide you and your family in your best interest.

As you can imagine, many insurance groups and commission-based financial advisors have been trying to expand the definition of “fiduciary” to include them. They weren’t successful. This summer a U.S. judge blocked a Department of Labor rule that would have expanded the types of retirement advisers who are considered fiduciaries – including those who sell high-cost annuities -- finding the rule was “arbitrary and conflicted with a law that governs retirement plans.”

Have You Created A Sale-Ready Business?

According to Exit Planning Institute surveys, four out of five companies listed for sale don’t sell, and seven out of ten family businesses don’t transfer on to the kids. In many cases, it’s not that the businesses aren’t viable and successful; it’s because the owners haven’t taken the time to plan their exits properly and don’t know how much they’ll need in “walkaway money” (net proceeds after taxes and transaction costs) to come up with a minimum sale price that will support their lifestyle in retirement. Put the odds in your favor. We have helped many successful business owners address the financial and emotional aspects of transitioning out of their businesses and successfully paying their “retirement bill” with room to spare.

As an owner, I’m sure you are constantly approached by vendors and advisors trying to help you plan your future. I can’t urge you enough to do your due diligence before signing on the dotted line. If nothing else, make sure you are working with a fiduciary. If you’re not sure if your solution provider is a fiduciary, just ask them. If they can’t (or won’t) answer the question directly, then you can be sure they’re not.

Conclusion

If you or someone close to you is thinking about exiting a business contact us any time to discuss. You’ve worked too hard to leave the future of your business (and family) to chance. We’re happy to help.

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ROBERT B. DUNN, CFP® is the President and Managing Partner of Novi Wealth