For many business owners, their companies are more than just a way to support themselves during their working years — they’re also their retirement plans. After all, years spent pouring energy into an enterprise can yield a profitable business that, when sold, offers ample funds to support the owner through their golden years.
In reality, this strategy comes with risks. Consider Gary, an optometrist in Georgia. For more than two decades, Gary expanded his patient base and grew the practice’s profitability. Last year, he expected to sell his practice for approximately $3 million to $4 million and retire comfortably. Yet when it came time to sell, a corporate optometry chain opened a location in his town, and prospective buyers were no longer willing to pay what he thought the business was worth. Gary could get at most $2.5 million, leaving him with a significant gap in his retirement funds because he was too preoccupied with running his business to diversify his retirement planning strategy.
Business owners who haven’t planned adequately for their retirement may be overly dependent on the sale of their business to fund their next stage of life. But things outside of their control — changes in macroeconomic conditions or shifting consumer demands, for example — can force them to sell for a fraction of what they think the business is worth or even delay the sale (and their retirement) altogether.
Fortunately, there are ways to mitigate these risks and prepare for retirement responsibly. Here’s what business owners should know.
Three ways business owners can diversify their retirement plan
By diversifying investments and saving for retirement, business owners like Gary can seek to ensure that whatever the market is like, they can retire comfortably on their own terms. These three best practices are a good place to start.
1. Maximize your retirement savings (beyond 401(k)s).
Business owners often help their employees prepare for retirement while neglecting themselves in the process. Providing a 401(k) plan to employees, for example, is common practice, but business owners don’t always contribute to their own 401(k)s. Even if they did, it still may not be enough to adequately fund retirement at their preferred lifestyle due to annual limits on tax-deferred contributions to a 401(k).
To take full advantage of financial instruments geared toward retirement, business owners should consider implementing profit-sharing and/or cash balance plans in addition to their 401(k).
Cash balance plans, which incorporate elements of both defined benefit and defined contribution retirement plans, allow business owners to set aside a greater portion of tax-deferred income, enjoying tax deductions and contributions in excess of 401(k) limits. Under 2024 rules, for example, a 50-year-old business owner can contribute as much as $281,500, fully tax deductible, in a properly structured cash balance plan. Similarly, deferred profit-sharing plans enable owners to set aside profits for retirement with substantial tax benefits and flexibility.
2. Develop a strong investment portfolio.
Passionate about their companies, business owners often reinvest profits back into the business. Yet to truly help minimize risk and prepare for retirement, it’s helpful to have investments that are fully separate from the business and capable of leveraging long-term market growth potential.
Working with an investment adviser to craft a portfolio that aligns with your goals can help take pressure off the business now, should there be an emergency, and later when you’re planning to sell it and retire.
3. Build your own buyer.
For business owners worried about what the market will be like when it comes time to sell their business, there is another option: Build your own buyer through effective succession planning.
Nurturing a relationship with a potential buyer, whether that’s someone currently with the company or a trusted party outside of it, can mean that when it comes time to sell the business, the sale goes smoothly and for a fair price. That’s because a buyer like this likely understands the value of the company and has a relationship with the owner.
As an added benefit, careful succession planning can help the business thrive even after its original owner or founder is no longer at the helm. For business owners who have poured their blood, sweat and tears into their businesses, leaving their company in trusted hands can help them confidently begin retirement and the next stage of their lives.
Own your future retirement
Gary and other business owners should always be planning for the future of their business and their retirement.
While these will likely overlap, relying only on the sale of a business to fund your retirement is too risky when your future is on the line. Having a diversified retirement strategy — as well as working with a financial adviser who understands you and your business — can help business owners plan for a secure and fulfilling retirement.
This article, which has been written by an outside source and is provided as a courtesy by Stephen B. Dunbar III, JD, CLU, Executive Vice President of the Georgia Alabama Gulf Coast Branch of Equitable Advisors, LLC, does not offer or constitute, and should not be relied upon, as financial, investment, tax, legal advice. Your unique needs, goals and circumstances require the individualized attention of your own tax, legal, and financial professionals whose advice and services will prevail over any information provided in this article. Equitable Advisors, LLC and its affiliates do not provide tax or legal advice or services Stephen B. Dunbar III offers securities through Equitable Advisors, LLC (NY, NY 212-314-4600), member FINRA, SIPC (Equitable Financial Advisors in MI & TN), offers investment advisory products and services through Equitable Advisors, LLC, an SEC-registered investment advisor, and offers annuity and insurance products through Equitable Network, LLC (Equitable Network Insurance Agency of California, LLC). Financial Professionals may transact business and/or respond to inquiries only in state(s) in which they are properly qualified. GE-6536878.1(04/24)
