How small business owners can plan their retirement

#Life after work

If you're a small business owner approaching retirement, it's time to create an exit plan

Small businesses are a vital part of Canada’s economy. In fact, more than 97.9% of all businesses in Canada are small, with fewer than 100 employees.1

If you’re an entrepreneur, you’re probably focused on taking care of daily business and may not have considered what’s needed for your retirement – even if it’s just a few years away. You’re not alone. More than three quarters of small business owners don’t have retirement plans in place for themselves or their employees.2

While your friends may have company pensions or an employer-matching program to help fund their retirement – it’s up to you to plan and fund your future. Here are a few questions and considerations to help you start to plan.

What does retirement look like for you?

1. When would you like to retire?

You’ll need to consider several factors, including your physical and financial health to determine how long you’ll have to accumulate wealth before retirement and transition out of the business. Read more on planning your retirement roadmap.

2. What lifestyle do you want in retirement?

Your lifestyle plans will help determine how much money you’ll need to enjoy your golden years. Think about how often you’d like to travel, volunteer or spend your days at home in the garden. And remember – retirement doesn’t have to mean leaving work altogether. It could mean taking on less responsibility, working part-time or consulting while your successor learns the ropes. Make a list of the activities you enjoy most and determine the costs to make sure they’re in your retirement budget.

3. How will you fund your retirement?

While many business owners plan to fund their retirement by selling their business, it can be risky to bank on it as your sole source of retirement income because there are a lot of unknowns, especially if you don’t have a buyer lined up. Have your business evaluated to know its fair market value and talk to your advisor about ways to diversify your retirement income.

While planning can take a bit of time upfront, knowing you are prepared for every scenario can help you relax and focus on what you do best.
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What future do you want for your business?

Every owner needs to leave their business at some point. A succession plan is important for the health of your retirement and to protect the legacy of the business you worked hard to build.

Here are some scenarios to consider:

  • Transfer or sell the business to a family member
  • Sell the business to a partner or employee
  • Sell to a third party

Even if you have a chosen successor, you’ll need time (possibly years) to prepare them to take over the business. They may need to build skills and relationships and learn all aspects of the business.

As you start to answer these questions, your advisor – in collaboration with your tax accountant and lawyer – can help you plan. They’ll factor in important considerations for the corporation and you personally, such as estate planning and transferring assets to your heirs, tax efficient investments, registered retirement savings plan (RRSP), tax-free savings account (TFSA) and Canada Pension Plan (CPP) contributions.

While planning can take a bit of time upfront, knowing you’re prepared for multiple scenarios can help you relax and focus on what you do best. Even if your exit plan is far off in the distance – having a succession plan in place means you’re prepared for the worst, should an emergency happen. That’s just good business sense.

This is the first of a series of articles on retirement topics for small business owners. Next, we’ll look at succession planning.