Small-Business Owners: Don’t Make These 3 Retirement Income Planning Mistakes

You know more than anyone how challenging it can be to launch and run a successful small business. Over the years, you’ve probably invested thousands of hours and dollars, missed family events and outings with friends, and generally sacrificed much of your life for your business.

While business ownership can be grueling, it can also be personally and financially rewarding. At some point, though, you will likely want to cash in on your hard work, get compensated for your business and enjoy a comfortable retirement.

Unfortunately, too many business owners invest so much time and energy into their business that they fail to plan adequately for retirement. As a result, they find themselves behind the ball as retirement approaches.

Below are three common retirement income planning mistakes made by small-business owners. If any of these sound familiar, it may be time to reconsider your retirement income planning strategy.

Mistake #1: Not diversifying outside of the business.

Your business may very well be your most valuable asset. However, that doesn’t mean it should be your only asset. Many business owners make the mistake of assuming that the sale of their business or the income from their business can fund their entire retirement. When that assumption turns out to be incorrect, they’re left in a difficult financial situation.

Don’t assume you can count solely on your business as a retirement funding vehicle. Diversify your retirement plan with a variety of account types and asset classes. Diversification can help you manage the risk of your business underperforming and being unable to fund your retirement.

Mistake #2: Not having a succession plan.

Unlike employees, business owners often don’t have the luxury of simply picking a date to retire. Instead, their retirement often depends on identifying a buyer, completing the sale and transitioning the business to the new owner.

That process can take years. There may be a limited number of qualified buyers in your niche or industry. Only a fraction of those potential buyers may have interest, and even only a fraction of that group may be able to get funding.

Or you may be planning on selling your business to a key employee or even a family member. Even though you could have a new owner identified, they may not be ready to take over ownership responsibilities. You may have to train them for a few years, or it could take them several years to generate the financing needed to complete the purchase.

Don’t wait until a few months or even a year before your planned retirement to develop a succession plan. Start thinking about your exit and your potential successor today.

Mistake #3: Planning on a cash payout.

In an ideal world, your buyer would be able to pay cash for your business. That’s often not the case. Many business purchases are financed by a combination of cash, lending, deferred compensation and even stock in the new company.

That means you could head into retirement with compensation that isn’t very liquid. Your deferred compensation may not be payable for years. The stock in the business may not be easily transferrable.

Plan ahead and account for the fact that you may not get your full sale price in cash. That means you may need other retirement assets to fund your lifestyle. Work with your financial professional to develop a savings plan and identify appropriate savings vehicles.

Ready to plan your exit from your business? Contact us at Bridgeriver Advisors in Bloomfield Hills, Michigan. We are happy to analyze your needs and objectives, and help you develop an action plan. Let’s connect today and start planning your retirement.

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15847 – 2016/6/27

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