Entrepreneurs are a different breed than normal people. They are optimistic, tenacious, and incredibly hard working. One of our favorite quotes is, “Business owners have very flexible jobs. They can work any 80 hours a week they want to.” You probably have great expectations about selling your business some day and being able to reap all the benefits of your hard work. Can I scare you for a minute? Imagine you don’t get what you need from your business. Then imagine you get little to nothing for it. It happens more often than not. Would you be prepared?
Many business owners put everything they can into their business. If they have ample income, they often spend it on their family to make up for the time away at work. These can be irreparable mistakes and they happen often. The eventual sale of your business can be a big part of your retirement plan, but you must diversify outside of your business to ensure at least a minimum lifestyle for yourself and your family should the business not do as well as you hope.
First, it’s critical that you operate with enough liquidity for both you and your business. Most banks would suggest 2 to 3 months of liquid operating capital on hand for the business. For you personally, we usually recommend 12 months of your personal living expenses in savings. While this may seem high, we’ve seen people and businesses saved because they had this level of cash. The good news is, once you achieve this goal, you don’t have to contribute more to it unless your lifestyle increases or you have an emergency and need to replenish it. FYI, this is part of a risk management strategy that should incorporate other tools such as your legal work and your insurance strategy.
Once risk is dealt with, you can start to focus on growth strategies outside of your business. Retirement plans are an obvious choice, but upon a second look, may not be as beneficial in and of themselves for business owners. A combination of qualified retirement plans, IRAs, and taxable accounts may be a much better strategy long term as well as short term for business owners.
If your spouse is employed, their retirement plan should be reviewed as an option, particularly if there is a match and the option for a Roth contribution. IRAs may make sense, but if your income is high, they probably won’t. A retirement plan through your business may make sense if the costs are not too high. Keep in mind, costs may include future contributions that have to be made on behalf of your employees. It can get complicated fast, but it’s not insurmountable and once a plan is on track it should be easy to maintain. While retirement plans may be a good part of the strategy, their contribution limits may not allow business owners to save enough money inside these plans alone.
Brokerage accounts are sometimes the most overlooked opportunities for business owners. While they can be less tax-efficient than retirement accounts, good tax planning around investment choices can make a big difference here. They can be set up to be as automatic as a retirement plan as well, and you have no cost for anyone outside of your family like you do retirement plans. Further, there are no stipulations for when you can take money out or limits on how much you can contribute. You can start and stop at any time. You can use these accounts for collateral for the business and have much needed liquidity in the short term, while taking care of your long-term retirement needs. You and your planner will choose these investments, so the limits will be wide. And in the end, these types of accounts can offer a lot of flexibility for your future.
While it’s great to stay focused on building the value of your business, you must remember the business exists first and foremost to take care of you and your family. If it can’t do that, then in the end it won’t serve you or your clients. You have to take a broader view and protect yourself and your family with more than just your business. Setting up a savings plan outside of it will give you a lot more security than relying on your business alone. A little thought and planning on the front end, coupled with a little automation, could reap valuable security later on.