Retirement Planning for Business Owners: Building a Retirement Beyond Your Company
For many business owners, the company they built is one of their largest financial assets.
It may provide income, support their family, employ other people, and represent years of hard work. But relying on the business alone to fund retirement can create significant uncertainty.
What happens when you stop working?
Will the business continue generating income? Will you sell it? Will a family member take over? Will your retirement accounts provide enough income? What happens if you want to retire earlier than expected?
Retirement planning for business owners requires looking beyond the business itself and creating a strategy for turning years of business ownership into long-term financial security.
Why Business Owners Need a Different Retirement Strategy
Traditional employees often have retirement benefits built into their employment.
They may have access to:
Employer-sponsored retirement plans
Employer matching contributions
Pension benefits
Group insurance
Social Security
Business owners have to take a more active role in creating their retirement strategy.
Your business may provide income today, but that doesn't necessarily mean it will provide enough income after you stop working.
Business owners should consider both building retirement assets and creating a plan to eventually transition away from the business.
Don't Assume Your Business Is Your Retirement Plan
One of the most common mistakes business owners can make is assuming they will simply sell the business when they're ready to retire.
Selling a business can be an important source of retirement capital, but there are no guarantees that:
The business will sell quickly
You will receive the price you expect
A qualified buyer will be available
The business will remain profitable
Market conditions will be favorable
You will be ready to retire when a buyer appears
Your business can be part of your retirement strategy without being your only retirement strategy.
Start With Your Retirement Income Goal
Instead of starting with a savings number, begin by estimating how much income you'll need.
Consider:
Housing
Food
Transportation
Healthcare
Insurance
Taxes
Travel
Entertainment
Family support
Debt payments
Other lifestyle expenses
Then estimate which sources of retirement income you'll have.
Potential sources include:
Social Security
Pension income
Retirement accounts
Investment accounts
Annuities
Rental income
Business income
Proceeds from selling the business
The difference between your expected expenses and predictable income can help identify your potential retirement income gap.
Separate Business Assets From Retirement Assets
A business can be valuable without being a reliable retirement income source.
Consider separating your financial planning into two categories.
Business Wealth
This may include:
Business equity
Commercial real estate
Business investments
Equipment
Intellectual property
Personal Retirement Assets
These may include:
401(k)
IRA
Roth IRA
Brokerage accounts
Personal savings
Annuities
Other investments
Building personal retirement assets can reduce your dependence on the eventual sale of the company.
Take Advantage of Retirement Plans
Business owners may have access to several retirement plan options depending on their business structure and circumstances.
These can include:
Traditional 401(k) plans
Solo 401(k) plans
SEP IRAs
SIMPLE IRAs
Defined benefit plans
Cash balance plans
Some plans can allow business owners and employees to make contributions toward retirement while potentially providing tax advantages.
The appropriate plan depends on factors such as business structure, number of employees, income, contribution goals, and administrative considerations.
Consider a Solo 401(k)
For eligible business owners with no employees other than a spouse, a Solo 401(k) can provide retirement savings opportunities through both employee and employer contributions, subject to applicable rules and limits.
This can make it a potentially useful option for certain self-employed individuals.
However, once a business grows and adds employees, retirement plan options and requirements can change.
Consider a SEP IRA
A SEP IRA can be another option for certain small-business owners.
It may provide a relatively straightforward way to make employer contributions for eligible employees and the business owner.
However, employer contributions generally need to follow applicable rules for eligible employees, which should be considered when comparing plans.
Don't Ignore Social Security
Business owners sometimes focus so heavily on their company and investments that they overlook Social Security.
Your claiming decision can have a significant effect on retirement income.
Consider:
Your expected benefit
Your full retirement age
Whether you continue working
Spousal benefits
Survivor benefits
Other retirement income
The timing of Social Security should be evaluated as part of your overall retirement strategy rather than treated as an isolated decision.
Create Multiple Sources of Retirement Income
Diversifying retirement income can potentially reduce dependence on any one source.
For example, a business owner might eventually receive:
Social Security: Government retirement benefit
401(k)/IRA: Investment-based retirement assets
Annuity: Potential contractual lifetime income
Investments: Flexible growth and income potential
Business sale: Potential retirement capital
Having multiple sources can provide greater flexibility than relying entirely on the business.
Consider Annuities for Lifetime Income
Some business owners may want a portion of their retirement assets to generate predictable income.
Certain annuities can provide contractual income for a specified period or potentially for life, depending on the product and payout option selected.
This can help address longevity risk—the possibility of outliving your savings.
For example, a business owner might use part of their retirement assets to create an income stream designed to cover certain essential expenses while leaving other assets invested for growth and flexibility.
Annuities can have fees, surrender periods, withdrawal restrictions, and other contractual features, so they should be evaluated carefully.
Plan for the Sale of Your Business
If you expect the business to fund part of your retirement, start planning the sale well before you intend to leave.
Potential buyers may include:
Family members
Employees
Business partners
Competitors
Investors
Other companies
A successful business sale often requires preparation.
You may need to:
Improve financial reporting
Reduce unnecessary expenses
Document operations
Develop management
Reduce owner dependence
Resolve outstanding liabilities
Establish a business valuation
Identify potential buyers
The more transferable the business is without you, the more attractive it may be to potential buyers.
Reduce Your Dependence on Yourself
A business that cannot function without its owner can be difficult to sell.
If you're personally responsible for most:
Sales
Customer relationships
Operations
Management
Financial decisions
a buyer may view the business as carrying significant transition risk.
Developing a management team can help make the company more transferable.
It can also give you the freedom to gradually reduce your involvement before retirement.
Use Life Insurance as Part of the Plan
Life insurance can play several roles in business-owner retirement planning.
For example, it may help with:
Business succession
Buy-sell agreements
Key person protection
Family financial protection
Estate planning
Executive benefits
Certain permanent life insurance policies may also accumulate cash value.
However, life insurance shouldn't automatically be considered a retirement investment simply because it has cash value.
Policy costs, fees, surrender charges, tax treatment, guarantees, and investment characteristics should all be evaluated.
Protect Your Family
Business owners should also consider what happens if they die before retirement.
Your family may depend on both your personal income and your business.
Life insurance can potentially provide financial resources to help replace income, support dependents, address debts, or provide liquidity for estate and business planning.
Your personal life insurance strategy and business insurance strategy may have different purposes.
Don't Forget Healthcare
Healthcare can become a significant retirement expense.
Business owners should plan for:
Medicare
Supplemental coverage
Prescription costs
Dental and vision care
Long-term care
Out-of-pocket expenses
Your retirement income plan should account for healthcare costs rather than assuming they will remain similar to your current expenses.
Plan for Taxes
Business owners often have multiple types of assets, which can create complicated tax considerations.
You may have:
Business income
Retirement accounts
Taxable investments
Real estate
Life insurance
Sale proceeds
The timing and structure of a business sale can affect your tax liability.
Retirement withdrawals can also affect taxable income.
Working with qualified tax and financial professionals can help coordinate these decisions.
Create a Succession Plan
Retirement planning and succession planning should work together.
Your succession plan should answer:
Who will own the business after you retire?
Who will operate it?
How will you be compensated for your ownership?
How will the transaction be funded?
What happens if you die before the transition?
A buy-sell agreement may be appropriate for businesses with multiple owners.
Life insurance can potentially provide funding for certain ownership transitions.
Start Planning Before You Need to Retire
The earlier you begin, the more flexibility you generally have.
If you wait until you're 65 to determine what your business is worth and who will buy it, you may have limited options.
Starting years earlier gives you time to:
Build retirement accounts
Diversify personal assets
Develop future management
Improve business profitability
Establish a succession plan
Purchase appropriate insurance
Reduce debt
Identify potential buyers
Retirement planning isn't simply an event that happens when you stop working.
It's a process that can take years.
Questions Business Owners Should Ask
Consider asking:
How much income will I need in retirement?
How much retirement savings do I currently have?
How much of my wealth is tied to the business?
What happens if I can't sell the business?
Who could take over the company?
When do I want to retire?
How much could the business realistically be worth?
What retirement plan should my business use?
Should I consider guaranteed lifetime income?
How will healthcare costs affect my retirement?
What happens to my family if I die before retirement?
How will taxes affect my retirement income?
Do I have a succession plan?
How often should I review my strategy?
The Bottom Line
Business owners have a unique opportunity to build wealth through their companies, but that wealth needs to be converted into a retirement strategy that doesn't depend entirely on the future success or sale of the business.
Your business can be an important part of your retirement plan—but it shouldn't necessarily be your entire retirement plan.
Building personal retirement assets, creating multiple income sources, planning for taxes, protecting your family, and developing a succession strategy can help create greater financial flexibility.
For some business owners, retirement income may eventually come from a combination of Social Security, retirement accounts, investments, annuities, and the sale or continued income of the business.
The right strategy will depend on your business structure, financial situation, retirement goals, and timeline.
You've spent your career building your business. Retirement planning can help make sure the wealth you've created can support you long after you step away from running it.