Wealth Building Strategies for Business Owners

Key Takeaways  

• Business owners often prioritize investing in their businesses over retirement savings and long-term financial planning. 

• Strategic tax deferral and diversified investing can help business owners build sustainable wealth. 

• Imagining how you’d take care of your “future self” can get the ball rolling in the right direction. 

Studies show that the majority of business owners start their ventures because they don’t want to work for someone else. They want to control their own schedule, pursue their passion and run things on their own terms. Sure, they strive to make money, but they often overemphasize lifestyle and self-reliance at the expense of building wealth. This approach makes sense while they’re still working, but what about when there’s no longer a “paycheck” coming in from the business? 

Evidence shows that business owners typically do not invest as much in  outside investments (i.e., stock and bond markets) as regular salaried employees do. As a result, they typically underutilize retirement savings accounts (SEPs, SIMPLEs, IRAs, Roths, etc.) compared to their W2 counterparts. These are all elements that business owners can employ to defer current income for future distribution needs. More on that in a minute. 

Entrepreneurs are gritty and self-reliant. In my experience, they tend to think they can build more wealth by growing and reinvesting in their business than they can by investing their money outside their company. Sometimes that’s true. But more often than not, hardworking entrepreneurs are so focused on reinvesting in their business that they tend to neglect the needs of their future selves.  

When looking at your exit plan and determining how you’re going to pull the value out of the business you’ve worked so hard to build, fast forward several decades. Have you taken good care of your future self who is say, a retired senior in reasonably good health with many years to live?  

Unfortunately, too many people envision their 75- or 80-year-old selves as strangers, rather than as an older, wiser versions of themselves. As a result, they don't feel any connection to that person or any empathy for them. But if they envision that person as a parent or close elderly relative, they’re more inclined to help them. And if they imagine that person as themselves, they’ll want to make their life as comfortable and fulfilling as possible?  

Research shows that people who feel a close connection to their future selves are more motivated to help them. Instead of telling themselves: “I have a good lifestyle and don’t have to answer to a boss,” business owners can flip their mindset to say: “Okay, this is great. I have all these great things because I work for myself, but now I need to start saving for my future self.”   If you’re a tradesman or other type of entrepreneur whose occupation is hard on the body, you may not be able to continue earning money after you get to a certain age. If so, then the first step is understanding cash flow and how much money you need to live on in retirement. You also want to clarify your long-term goals beyond just working for the rest of your life. These things are possible if you start early enough.   

Say you’re making $100,000 a year. That may sustain you now, but when you’re 65 or 70 and want to stop working, where is that $100,000 coming from? Social Security won’t be enough. And then you must account for medical expenses – likely more than you’re currently facing – and other expenses that you haven't imagined yet. When you’re no longer a business owner, you can’t keep running personal expenses through the business such as cars, dining out, entertainment, country club memberships, and out-of-pocket medical, etc. Those items must be paid for with your retirement income.  

Ultimately, it’s about changing your mindset from reinvesting all your wealth back into the business to finding a way to support your future self. You can also consider relocating to one of 13 states, such as Pennsylvania, that don’t tax retirement income. Or you can move to one of eight states with no income tax of any kind, including Texas and Florida.  

If you're a successful entrepreneur, you're likely climbing into higher tax brackets, say from 24% to 37%. If you can defer some of your income through deferred tax savings plans, you can delay paying tax on that money until you start drawing on it in retirement (when you’re back at say, the 22% or 24% bracket). That way you're saving yourself upwards to 13% to 15% in taxes on every dollar that you make.  

Real World Example 

I recently met with someone who was very accomplished in their profession, but they knew nothing about investing. They put any spare cash they had into an interest-bearing savings account and that was about it. To their credit, they accumulated over $1 million in the savings account. But since they didn’t participate in the stock and bond markets, they missed out on so much upside opportunity. In other words, they opted to take on inflation risk and interest rate risk instead of volatility risk – the risk that comes with investing in the capital markets. When looking at your future self, inflation and interest rate risk are your enemies, but volatility risk is your friend.   

Conclusion 

When it comes to investing, your future self will love you for that and will probably say: “I’m so glad I met with my advisor when I was in the peak years of running my business.”   If you or someone close to you has concerns about your retirement or exit planning, contact us any time to discuss. We’re happy to help. 

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