by CLIFF TAYLOR, PARTNER
Owning a profitable business is a wonderful thing. While it can take a lot of hard work, diligence and risk, the potential freedom and pride obtained as a business owner can outweigh being an employee for many individuals.
At TrustCore, we work with a lot of successful business owners, but there’s one mistake we see many of them make.
What’s your plan for retirement?
For many business owners, their company’s finances are top priority. They may track every dollar that comes in and know where every dollar is going out. However, they often forget about their personal finances. Even if you plan to “work forever,” the time may come when that mindset changes. In these situations, as financial planners in Tennessee, we see a few common misconceptions surrounding retirement planning, that put you and your business at risk.
Although the complexity of running a business may make retirement less of a priority for you, it’s still very important to have a retirement plan in place. The team at TrustCore examines some of the biggest misconceptions business owners have about retirement.
Misconception #1: You’ll Sell Your Business and Live Off the Proceeds in Retirement
If your business is consistently profitable, it may attract interested buyers at some point. But selling your business may not be a fully viable retirement strategy.
For starters, you’ll need to find someone who has the means to purchase your business and believes in your business enough to give you the amount you were hoping for. Or need. Not only is this not guaranteed, but you can’t fully control how much your business will sell for, which makes this retirement planning ideology difficult.
What if you’re expecting to sell your business for at least $5 million, but a buyer is only willing to offer $4 million? After you pay off your business debt, will you have enough to retire on without needing to work again?
Industries and consumer demand rapidly change. If your company generates revenue reliably, great! Just be aware that at any moment, your revenue can fluctuate. No one could have predicted what happened in 2020!
These risks are not to deter you from running your business. It’s only a reminder that selling your business shouldn’t be the core of your retirement plan. Work with a financial planner to connect more pieces to your retirement puzzle, and come up with a strategy that allows you to reach your retirement goals.
Misconception #2: You’ll Leave Your Business to the Next Generation
A family-run business is a great way to build and maintain generational wealth. It can be much easier to pass down your existing business to your heirs than trying to sell it, giving your heirs the chance to build upon your momentum and continue growing your business. However, passing down a business, unfortunately, can be harder than you think.
First of all, do your children even want to take over the business? It may appear to be a no-brainer, but your children may not be interested. It’s important to have a conversation early, and revisit your plans as you get closer to handing over the reins.
Without a clear plan, many businesses fail to reach the next generation. In fact, it is estimated that less than 15 percent of businesses successfully pass down to the next generation.
Work with a financial planner to put together a contingency plan. Don’t bank on your children continuing the business until you are absolutely sure.
Misconception #3: You Can Handle Your Own Financial Planning Needs
Business owners tend to wear a lot of hats. But should financial planner really be one of them? Juggling your personal finances with that of your business’ can result in potentially leaving money on the table.
Considering how much time and dedicated effort it takes to run your business, are you certain that you’re spending enough time and energy on your personal retirement plan? Fortunately, a financial planner can be a great boost to your growth potential and overall confidence.
Despite common belief, a financial planner can actually be more beneficial for a business owner.
Working with a financial planner can help make the complexity of your financial life simpler. A financial planner can help you take stock of your current financial situation, give better clarity of your financial goals, and create a comprehensive investment strategy and budget to help you reach those goals. Are you sure that’s something you want to (and can) take on yourself?
Furthermore, a financial planner can help with many of the crucial administrative aspects of your finances as well. In addition to creating an automated investment strategy, a financial planner can find tax-efficient investments to help lower your personal and business tax burden.
Lastly, your financial planner should be your go-to resource for creating a succession plan for your estate, which includes your business assets. With the amount of effort it takes to get a business off the ground, make sure no stone is left unturned in your retirement plan, and no important financial matter falls through the cracks.
Misconception #4: Social Security and Medicare Will be Enough During Retirement
Many Americans rely heavily on Social Security and Medicare during retirement. But in reality, these two income sources should only be part of your financial plan, not the core of it. According to the Bureau of Labor Statistics, individuals over the age of 65 spend $50,637 a year, or $4,219 per month.
The average Social Security benefit, on the other hand, is only $1,543 per month, which only covers 37 percent of how much the average retiree spends. Everyone’s Social Security benefit can differ, of course, but this data shows that Social Security alone is likely not enough.
Medicare provides a great benefit to its users as well, and generally becomes available at age 65. Its different components cover many important healthcare services like hospital visits and skilled nursing care. But Medicare has important limits to be aware of.
If you’ve been in the hospital for longer than 60 days, for example, Medicare Part A’s coverage is reduced significantly, resulting in co-pays that exceed $350 per day. After 150 days, you are responsible for all costs. Therefore, if you are concerned about your health or overall longevity, it’s important to have a supplemental source of savings or cashflow beyond Medicare.
Misconception #5: Your Business will Automatically Go to Your Loved Ones or Partners When You Pass Away
Similar to your bank and investment accounts, your business may not go to an heir or loved one automatically unless you have paperwork that explicitly says so. What happens to your business after you’re gone depends on the type of business, and the state in which the business runs or is incorporated.
Also, what are your insurance needs for the business? Do you have insurance that protects you if a partner passes away or retires? Having an estate plan in place is a vital piece of responsible business ownership. This is one of the main areas where the business and personal plans of an owner are intertwined. At TrustCore, our financial planners help clients ensure that there is minimal business interruption and that their families are properly provided for in either situation. Our team is experienced in helping business owners put buy/sell agreements in place and can assist with the purchase of buy/sell insurance along with key man insurance, as appropriate.
These are just some of the reasons why estate planning is so important. For more on what this looks like, read our recent blog post: Estate Planning in Tennessee: Could You Benefit from a Community Property Trust?
The Bottom Line
Amid all of your business success, don’t forget to have a comprehensive retirement plan for yourself. Your business may bring you to financial independence (if you haven’t achieved it already), but having a contingency plan – essentially, an additional layer of protection in case the unexpected happens – can give you a tremendous peace of mind.
If you’re looking for a financial planner in Tennessee to work with or feel it’s time to make a change, let’s talk. Schedule a no-obligation conversation with the financial planners at TrustCore to see how we can help.
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