Strategic Retirement Planning for Small Business Owners Who Want to Retire Early

There’s no denying that small businesses played a vital role in upholding the U.S. economy during the pandemic by providing essential products to consumers and employment stability to workers. Despite their critical efforts to retain normalcy, business owners endured difficult setbacks during the past few years, facing significant economic challenges. In the third quarter of 2022, only 33% of small business owners described business conditions as “good.”

Busy senior businessman working on a retirement plan

Accordingly, the number of owners who plan to retire earlier than expected has climbed 100% since 2020. It’s hard to blame small business owners, but there are several problems with this massive increase. For starters, an estimated 34% of small business owners don’t have personal retirement savings plans. Another 40% don’t feel like they’ll be able to retire by age 65.

If you’re a small business owner, you should begin planning your finances for the future today. Even if you don’t want to retire early, planning for retirement is best accomplished by taking advantage of all the benefits that come with saving early in your career. Retirement planning also allows you to build a strategic financial plan that encompasses your overall net worth and determines whether you can afford your personal living expenses post-retirement.

Planning Your Finances for Early Retirement

The question is: What is the best approach to building a more strategic retirement plan for small business owners? To begin, consider these five critical pieces of advice:

1. Maximize your retirement account savings immediately

When planning for retirement, it’s no secret that you should start saving as soon as possible to maximize your savings over time. The money in tax-advantaged retirement accounts will have decades to compound and grow, ultimately providing more funds for your retirement years.

Additionally, contributions minimize your current income tax liability and diversify your investments outside the value of your business. As such, you would see the benefits of retirement planning today and in the future.

2. Engage a third-party valuation of your business

As you explore the idea of transitioning your business, a valuation can offer a third-party opinion of your business’s actual value. You won’t regret this decision, as your expectation of the business’s value will likely differ from that of a potential buyer.

Should the business valuation not meet your expectations, time is on your side to drive its value. This is especially critical if you expect the sale of your business to account for a large portion of your retirement assets.

3. Start succession planning

Whether transitioning ownership of your business to family, key employees, or third-party buyers, you have to weigh the pros and cons of your options. For example, a sale within the family might require you to gift or finance the transaction over time and account for a management transition period.

On the other hand, you will generally see a full exchange of funds on the date of purchase with a third-party sale — not to mention greater monetary value. A third-party deal could also include a request for you to stay on for a consulting period. When succession planning, it’s important to work out all the details and develop a framework early on to ensure a successful transition and mitigate the risks often involved or the need to extend your time horizon.

4. Understand the tax implications of a potential transaction

The tax consequences of a sale can significantly affect the net value received for your business. Appropriate planning before a transaction can provide substantial benefits in maximizing the business’s after-tax value or minimizing estate tax consequences.

Work with a tax professional to ensure you get the most out of your business sale and walk away with greater peace of mind. Business and personal financial advisors can also provide insights and serve as advocates in ensuring your successful business transition and retirement.

5. Revisit your personal financial plan

Planning for retirement as a small business owner is never complete without a personal component. Consider the potential value obtained from the business in conjunction with retirement cash flows to assess the appropriate timing to retire early and maintain your desired lifestyle.

With retirement plans for small business owners, it’s also essential to factor in the additional time you’ll have and how it might change your expenses. After all, you’re no longer running the business, and you might find yourself spending more money than previously anticipated as you have more free time to do so. Plan accordingly.

Retirement planning

It’s never too early to start planning for retirement. The sooner you start, the more flexibility you’ll find for building your finances and transitioning the ownership of your business. Both will be essential to realizing your post-retirement goals, no matter when you decide to hand over the reins.


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