Apr 25, 201909:59 AMOpen Mic
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Retirement for business owners: Don’t put all your (nest) eggs in one basket
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For many small- to medium-sized businesses, the owner's single largest investment is the business itself. The retirement plan is to live off the sale of his or her life’s work.
This approach may provide incredible benefits, but also carries some unique inherent risks. Those risks are often exacerbated by the fact that the owner’s spouse may work in the business, as well, which means the couple’s retirement nest egg is all in one proverbial basket.
It’s easy to understand how and why this happens. For businesses of roughly 100 employees or less, the business and the owner are practically one and the same — it’s difficult to distinguish the value of one from the other. In fact, your business is often successful because you put your sole focus and invested all your energy into its livelihood.
It’s the nature of the beast.
The best way to safeguard that investment and create the retirement lifestyle you’ve been expecting is to build in a fallback plan through diversification. It’s never too late to get started.
The risks and rewards of 'my business is my retirement'
As a financial planner, one of the most common things I hear when talking to small business owners is, “My business is my retirement.”
You’re not alone when it comes to this approach, and believe me, this method can be effective. In addition, building your own business over the years often feels like a more stable retirement solution because owners feel some sense of control over their future.
The downside is that it is actually much more volatile and unpredictable than the more standard approach of retirement planning. For example:
- Global events can impact your bottom line. From wars in other parts of the world to weather catastrophes, raw materials can unexpectedly become unattainable.
- Markets change with new innovations. I’m sure typewriters felt like a sure bet before computers came along. Calculators, radios, watches, and cameras are all on your smartphone these days. You can’t imagine that your business will become obsolete until something you can’t imagine hits the market.
- Recessions affect business valuations. I’d love to say I can predict the next big downturn in the economy, but we really only guess at generalities in the market. An unexpected recession can leave you wishing you had retired last year — and require you to continue working or take much less than anticipated.
A more reliable approach is to diversify your retirement dollars independent of the business so you have multiple “baskets” to protect your future.