Planning For Retirement
Business owners face unique challenges when planning for retirement. While a successful business can go a long way toward providing for a comfortable retirement, there’s no crystal ball to tell you where your business will take you by the time you retire. Even if your business is highly successful, you might decide to leave it to your children instead of selling or liquidating to finance your retirement.
That’s why retirement planning for business owners requires a two-pronged approach: determining how your business can help finance retirement and at the same time saving and investing for retirement through conventional means such as RSPs. Retirement planning must also take into account that you’re unlikely to have any kind of workplace pension.
No matter what role your business plays in retirement, you’ll need a succession plan. It should detail when you’ll retire, and how you’ll deal with the business when you leave. Consider it a roadmap for your and your business’s future.
Will Your Business Finance Your Retirement?
To explore whether your business is likely to provide enough funds for a comfortable retirement, considering the following:
- What is your business worth today?
- When do you plan to retire? What do you expect your business to be worth then?
- Can you sell your business as a going concern?
- Does your business have capital assets that can be liquidated?
- What are the tax consequences of selling your business?
- Do you really want to sell or liquidate instead of passing your business along to your children?
- If you leave the business to family members can you retain a stake and receive retirement income through your share?
Invest In An RSP
If your business won’t fully fund retirement you need to accumulate wealth outside the business. Even if your business meets all your financial needs in retirement, they money you save and invest outside the business can supplement your income for a more comfortable retirement.
An RSP is the logical choice for retirement savings. Your investments grow faster in an RSP because taxes are deferred until you use the money to fund your retirement. But even an RSP requires an element of business planning. To build a healthy RSP you’ll need to make sure your business provides you with enough annual income to allow sufficient RSP contributions every year. That may be difficult in the early stages of a business, when you’re likely to be more interested in investing in the business than in yourself.
Annual RSP contribution room is set by the government each year as a maximum dollar amount ($22,000 in 2010) or 18% of the earned income reported on your previous year’s personal income tax return—whichever is less. If your business generates a low personal income, 18% won’t go far.
You can learn more about RSPs here.
Explore Other Options
You can explore other personal retirement savings strategies. These include investing outside a retirement plan (best done after maximizing RSP potential) and income splitting through vehicles such as a spousal RSP. Depending on your business and personal situation there may be other tax-advantageous ways to set money aside for retirement.
It’s also important to protect your business and your personal wealth. If you become ill or disabled, your business could suffer and your retirement plans could be jeopardized. Or if you die before your spouse, his or her finances could suffer, including retirement prospects. Disability insurance, life insurance, and other financial measures can help protect against the unexpected.
Have An Estate Plan
And remember, retirement isn’t likely to be the only financial goal in your future. You’ll possibly want to leave part of your wealth to your heirs, either during your lifetime or when you die. That may or may not include business assets. So make estate planning a priority.
Business, retirement and estate planning are complex matters. It’s important to seek professional help with planning, tax, estate and other issues. Start with your Commercial Account Manager at your local BMO Bank of Montreal branch or call BMO Bank of Montreal Direct Banking for Business at 1-877-262-5907.
