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Retirement Planning for Business Owners

Sept. 29, 2011
4 mins
A senior couple reviews documents with a financial advisor

First off, congratulations to you. You followed your gut instincts and launched a business. Now, truly against the odds, it’s not only survived, but is flourishing. So, have you thought about your retirement plan yet? In the midst of these heady days of growth and expansion it may seem like an odd question, but it’s an important one to ask. Owning a successful business does not necessarily equate to a successful retirement plan. Here’s a look at some options to help ensure you retire the way you’d like.

Taking money from the business

There are a number of options that would enable you to take money out of the business you’ve invested so much in. The most obvious is, when the time comes, to sell your business, then use the proceeds to fund your retirement. (See below for some options on where to invest those funds.)

Another option is that long-before you’re ready to retire, you bring a partner into the business, selling them a portion of the company. You will have to figure out a workable management hierarchy, not to mention share of any profits going forward, but you will get a lump sum of money with a fair bit of lead time in which to invest it.

Finally, you may have visions of your children taking over the business when you’re ready to retire. Assuming they’re interested (and you do need to ask them before you start implementing a plan based on erroneous assumptions), you could divide the company into shares, held by you and each of your children. Then, structure the company so that shareholders are paid annual dividends from the profits. (Of course, if the company doesn’t make any money in a given year, there will be no dividends to pay out.)

Successfully selling or transitioning a business is a lengthy process (typically taking three to five years), so you really do need to plan ahead. And regardless of the approach you take, you’ll need to do something with the money you have to ensure it lasts you through your retirement years.

Investment options

It’s no secret that the key to any investment plan is diversification. You’d be foolish to rely solely on your business to finance your retirement. What if it’s not as valuable as you think? Or worse, some new competitor or technology comes along and eliminates your market share? Here are a few places you can park any money you withdraw from your company until you need it for the non-working phase of your life.

Registered Retirement Savings Plans or Tax-Free Savings Accounts

RRSPs and TFSAs are similar in that you’re investing your money in a mix of mutual funds, stocks, bonds, and other investment vehicles. The key difference is the form of tax-savings each offers. With RRSPs, you deduct your investment from your income for the year they’re purchased. With TFSAs, any money earned in the investment is non-taxable.

Bonds and GICs

If you’re looking for a stable investment option, consider bonds and GICs. Barring an economic apocalypse, your investment principal is guaranteed, and you’ll know precisely how much they’ll earn over the course of the investment period. With both, you’re able to withdraw the interest at set periods of time prior to maturity.

The stock market

Than again, given that you’re an entrepreneur, odds are you’re not entirely adverse to risk. While in recent years, investing in the stock market has offered more risk than reward, historically the returns on major stock indexes are a little under 10 percent. At the very least, stock tracking can become a retirement hobby.

Allan Britnell

Toronto-based freelancer Allan Britnell is an award-winning writer with nearly 20 years’ experience. He covers a diverse range of topics, including DIY and professional home renovation projects, nature and the environment, small business, personal finance, and family and health issues. He is also the managing editor of Renovation Contractor, the publication written for small- and medium-sized contracting and custom home building companies. He lives in Toronto with his wife, two daughters, and their dog, Oscar.

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