Planning for Retirement as a Business Owner

While retirement is often associated with freedom, it can also bring anxiety for those who are not well-prepared. Entrepreneurs are no exception and must meticulously plan their retirement from the very beginning to maximize their personal and professional wealth while reducing taxes when retirement comes. Without a structured retirement plan, even successful entrepreneurs face uncertainty about their financial situation during retirement.

Before implementing a retirement strategy, you need a clearer picture of your financial needs during retirement. Some factors to consider include:

• Future Lifestyle Habits: Will you maintain your current standard of living? Do you plan to travel extensively? Will you engage in expensive hobbies or move?
• Inflation: Today’s dollar won’t have the same purchasing power in 20 or 30 years. A good retirement plan accounts for inflation, which is typically 2-3% per year, meaning your retirement income needs will likely increase over time.
• Life Expectancy: With people living longer, your retirement savings may need to last 25-30 years or more. This extended timeframe requires careful planning to ensure you don’t outlive your resources.

As an entrepreneur, you have a wide range of options for generating retirement income that matches your goals. The most obvious is, of course, your business.

Many entrepreneurs assume that selling their businesses will fund their retirement. While this is partly true, relying solely on the value of your business carries significant risks. Market conditions, industry changes, or unforeseen circumstances can affect your business’s value when you’re ready to exit.

As discussed in “Building Your Business vs. Building Your Personal Wealth,” asset managers often recommend diversifying investments, whether inside or outside your business, to better manage your risks.

In a retirement planning strategy for business owners, several advantageous strategies and investment options can contribute to wealth growth and, by extension, income at retirement. Some of these options include:

• Individual Pension Plans (IPPs), Registered Retirement Savings Plans (RRSPs), and Tax-Free Savings Accounts (TFSAs)
• Corporate-owned life insurance
• Dividends
• Real estate
• Stocks, mutual funds, bonds, etc.
• Financial products such as annuities
• And more

These elements are part of personal and corporate investment strategies designed to optimize returns while mitigating risk. It is advisable to review your retirement goals and wealth planning strategies with your wealth management advisors to maximize your retirement income and minimize taxes.

The most complex aspect of retirement planning for business owners is the transition out of the business. Many entrepreneurs understandably experience anxiety or uncertainty about relinquishing control of a company they’ve nurtured and grown. This process requires careful business succession planning strategies that consider not only the legal structure and continuity of your business but also your emotional readiness and financial needs.

• Sale or Family Succession: If family members are interested and capable of taking over your business, you can implement a gradual transition plan. If selling to a third party is preferable, you must maximize the value and marketability of your business well before your planned exit.
• Buy-Sell Agreements: These legally binding contracts specify how a partner’s share in the business can be reassigned if they leave due to retirement, death, or other circumstances. Well-structured agreements, funded by life insurance, can provide liquidity while ensuring business continuity.
• Estate Freeze and Trusts: These succession planning tools for business owners can help transfer future growth to the next generation while securing your retirement income and minimizing taxes. By “freezing” the value of your interests in the business, you can limit your tax liabilities while facilitating an orderly succession.

The Example of Carole

Consider Carole, the owner of a civil engineering firm who froze her succession ten years before retirement. She converted her common shares into preferred shares with a fixed value while her children received new common shares. The subsequent growth of the business accrued to her children’s shares, effectively transferring wealth while securing her retirement income through the preferred share redemption schedule.

After stepping away from your business, managing your wealth will become your next priority. Consider the following key post-business transition strategies.

Diversified and Tailored Investment Strategy

Your exit strategy should include diversifying the proceeds from your business sale across different asset classes – such as dividend stocks, bonds, real estate, and annuities – to manage risk and generate stable retirement income. Proper tax-efficient withdrawal planning can also help minimize unnecessary tax burdens.

Planning for Healthcare and Liquidity Needs

As you age, healthcare and unexpected expenses can impact your financial security. A well-structured plan should ensure sufficient liquidity for lifestyle expenses, medical costs, and potential long-term care needs through insurance or liquid reserves.

Ongoing Wealth Management and Plan Adjustments

Retirement planning is not a one-time exercise. Regularly reviewing your strategy with your wealth management team ensures it adapts to changing personal circumstances, tax laws, and market conditions, keeping your financial goals on track.

As an entrepreneur, you have built your success through initiative and strategic decisions, and your approach to retirement should be no different. By making decisions early and working with various wealth, financial, and succession experts, you can better ensure a comfortable and enjoyable retirement.

At The St-Georges Group, we understand the unique challenges of retirement planning for business owners. We specialize in wealth planning for entrepreneurs that encompasses estate planning, business succession, and personal and corporate investment strategies to ensure a smooth transition from entrepreneur to retiree. We are here to support your transition, helping you develop a comprehensive and tax-advantaged retirement plan that allows you to look to the future with confidence and clarity.