Small Business Owners – Planning for Retirement

Taking responsibility for your own golden years.

Although figures vary, it’s thought that around a third of small business owners don’t have a retirement savings plan. There could be any number of reasons for this, from a lack of spare cash, to a lack of foresight. However, for those who are in business for themselves, this could have some serious consequences.

With no employer to make pension contributions and no auto-enrolment it could be all too easy for small business owners to end up without anything set aside at a crucial time. If you are concerned about your retirement and how much pension you should save for retirement then now is the time to.

Start with a retirement budget

“Planning for retirement” is an enormously general term and tends to feel slightly overwhelming if you’re starting from scratch. The first thing to look at is the retirement budget. How much are you going to need to live on when it comes to hanging up your smart phone for good?

Remember that if you’re currently self-employed there could be a number of benefits that might go when you retire, such as a company phone or a car leased through the business. When you’re creating your budget you’ll also need to bear in mind the age at which you want to retire and whether you’re likely to still have mortgage or rent payments to make. Over and above that, it’s a good idea to break down your budget into essentials (energy, food, transport) and extras (travel, clothes, eating out).

Don’t assume your business will be your pension

Many small business owners pour all their energy and cash into the business during working years and assume that it can be sold when the time comes to retire. It is risky to rely on the sale of a business in this way, as you have no real idea of what the business is likely to be worth when the time comes – or even if you’ll be able to find a buyer.

If you don’t have any other retirement options then you’ll be forced to keeping working to live. Of course, if you want to keep working as long as you can then your retirement planning will need to take a slightly different form. For example, what insurances will you need in case of time off for illness as you get older, what’s your back up plan if you change your mind and who inherits the business as an ongoing concern?

Pay into a private pension

Many entrepreneurs say that they haven’t done much in the way of retirement planning, not because they don’t want to, but simply because they have to plough any extra cash back into the business. In fact, although the business might need considerable support at various points in its lifecycle, it is always possible to find something to contribute to a private pension. Even if you’re only making minimal contributions to that pension you will still have something more to rely on than just state support when the time comes.

Diversify your options as much as you can

In terms of security and growth it often pays to put cash aside in to as many different retirement options as possible when you’re a small business owner. Find simple savings accounts where you can lock in an interest rate that will give you a higher than normal return on any savings you make. Look into tax free vehicles for savings, such as ISAs. Even if you’d never considered the option of investing your money, it might be worth taking an interest, even for just a small proportion of your savings. A small investment portfolio that carries a low risk could significantly increase your returns and consequently what you have available for income in the future.

Start planning and saving as soon as you can

You might be starting an online business in your 20s – or you could be a much more experienced entrepreneur nearing 40. Whatever your age it’s important to start retirement planning as early as possible. The younger you are when you start saving, the smaller the payments can be. If the excitement of business growth and expansion seems more appealing than saving into a pension, don’t forget that even small contributions now could make for a much more comfortable retirement in future so you might be able to do both.

If you’re planning to cash out of your business then go for growth

Cashing out at 65 i.e. selling the business at retirement age for a nice fat sum to see you through the golden years might be your dream. If it is then you need to go for growth during the years that you’re still working – and make sure you’re making lean business choices to keep costs low. If you’re planning to cash out then start thinking about valuations well before the time comes and work out what you need to do to achieve the valuation that you’re hoping for. Above all, make sure you’re being realistic with valuations as getting it wrong can be dangerous. For example, if you think you will achieve a $750,000 valuation but you get just $500,000 that’s almost a third of what you thought you’d have for retirement gone.

Pay yourself

As a small business owner you might be tempted not to pay yourself a salary but to keep the cash in the business to help it grow. It will be almost impossible to plan for retirement if you do this as most types of retirement savings require income to make them happen. Even if you’re just paying yourself the smallest of salaries, make sure that you do pay yourself something. It will motivate you to use the money wisely and will help to avoid ending up in the position of having a lot of debt in old age.

Make a will

It’s particularly important to make a will if you’re a small business owner so that you can divide up the value you’ve created in the way that you want to. A financial advisor can help you to decide the best way to do this, both to make what you leave behind more tax efficient and also to ensure that your wishes will be respected.