Dangerous Assumptions Business Owners Make About Retirement

Dangerous Assumptions Business Owners Make About Retirement

Most working Americans plan to retire at some point in their lives, even if they love what they do. But have you ever stopped and asked yourself how?

This is an especially important question for business owners, because their retirement planning is completely left up to them. There’s no employer who is matching their 401(k) plan. There’s no pension that promises them a lifetime of benefits.

Unfortunately, many business owners assume they’ll simply sell their business when the time comes and live off the proceeds. But this can be a very dangerous plan.

At Montgomery Taylor Wealth Management in Santa Rosa, CA, we work with a lot of Sonoma County business owners and help them establish a formal exit plan. We help them formalize their ideas for what they plan to do when they’re no longer running their company. Retirement is hard for a lot of retirees, especially those who found purpose in their careers. This can be an even tougher, more complicated transition, both financially and emotionally, for a small business owner.

For example, if you’re planning to sell your business, how will you find the right buyer? And what if you don’t get the price you were hoping for?

If you’re planning to leave your company to family or your business partners, have you let them know?

Like any other formal plan, exit plans are designed to prepare for the future and reduce uncertainty. An announcement that you will no longer be running the business you created shouldn’t come as a surprise.


Do you have a plan for what you’ll do after you leave your business? Talk with the team at Montgomery Taylor Wealth Management and get the conversation started.


If You Plan to Sell Your Business

Many business owners have lovingly tended their enterprise with the idea that a sale of it could provide a fitting flourish at the end of their working lives – and that the financial proceeds realized would entirely support them in their Golden Years.

It’s never prudent to assume you can sell the business and make that your only retirement plan. Many things can go wrong. COVID-19 is a perfect example.

The sale of a business is never entirely assured. Overall market conditions affect all aspects of a business, including demand. You may be in the market to sell, but find few or no buyers due to many factors, including economic downturns or waning product popularity.

Price can also be a huge variable. You may expect to realize proceeds that never materialize (if you can’t sell the business) or that are far less than you expected.

What to Consider; How to Plan 

A smarter course is to save into a retirement plan yourself, such as a 401(k) or IRA, throughout your working years. At a maximum, assume that any business proceeds will be on the lower end of any models, and never plan to retire on business proceeds entirely.

If You Plan to Leave Your Business to Your Kids or Family Members

If you plan to leave your business to your children or other family members, don’t assume that the succession will happen automatically. It’s important to have a will or trust as part of a comprehensive estate plan, leaving the business to specific family members and itemizing which parts of the business they will inherit.

It’s also prudent to set forth the plan in specific legal documents. These, too, should specify which family members inherit which parts of the business. Don’t assume, for example, that the eldest child will run the business. He or she may have no desire or aptitude to continue it, while another family member does.

This is true even if the anticipated positions are currently held by the family members you want to eventually take over. Once the business changes by your exit, it is possible for those positions to be contested or changed. Nothing about current circumstances makes your future plan automatic unless you specify it in legally binding documents.

What to Consider; How to Plan

If your family members don’t currently hold the roles, have a frank discussion with them. It’s important to know that they desire to fill the positions you want them to and have interest in the business. If they don’t, you will need to make another plan.

Make your plans and the rationale clear to relevant interested parties. One big risk in family-run businesses is conflict. Family members you might not have considered may want a role in the business. Or, family members may want some of the assets of the business, and may prefer selling all or pieces of it to a succession plan.

Making your plans and the reasons for them clear can eliminate a lot of conflict. But it may not eliminate all of it. Family-run businesses should have a conflict resolution plan to reduce or eliminate conflict. It could be a council of trusted family members who hear all sides, professional consultants, or a combination of the two. If you don’t currently have a plan, be sure to set one up before stepping out of the business.

If You Plan to Continue to Work Part-Time or on Another Basis in Retirement 

Working during retirement is becoming more and more common, fueled by longer life expectancies and the possibility of relatively good health in your Golden Years. If you retire at 65, for example, you may live two or three decades more, or even longer.

You should be aware of both pros and cons.

On the pro side, it’s a chance to keep growing and engaged in the community. You may even learn entirely new things. While you may not need the income, the extra money can be nice to have. Work can also provide a sense of purpose.

But the potential negatives shouldn’t be ignored, either. You may find that downtime in retirement feels so wonderful that you just want more of it! In that case, you’ll have to strategize exiting the part-time work.

If you have other plans, such as consulting in your former business occasionally, your presence can become politicized or even viewed as a negative. Your opportunities for participating in the workforce may be affected by any sudden declines in health, which start to occur more often as people age.

Finally, you may find that your income, combined with Social Security and any retirement withdrawals, cause you to be taxed more than you expected.

What to Consider; How to Plan

Discuss the likely pros and cons of your position with your financial advisor. Be realistic about all aspects of working in retirement. If possible, do a trial run in your part-time position or other planned role before you fully commit to it, so that you can see any potential challenges in the road.

In terms of income, be aware of potential taxation. Many people are under the impression that Social Security benefits aren’t subject to tax, for example. However, anywhere from 50 percent to 85 percent of the benefits can be subject to tax if you combine paid work with drawing benefits, depending on the amount of your working income.

You will also need to consider the effect of any Required Minimum Distributions (RMDs) of your retirement savings, such as 401(k)s and IRAs, on your taxable income. RMDs are subject to tax at your existing rate if they are from Traditional 401(k)s and IRAs. Only if these are Roth accounts held for at least five years are they exempt from tax.

How We Can Help

Exiting a business upon retirement can be complicated. Consult a financial advisor to determine the most prudent strategies. If you’re looking for a financial advisor in Santa Rosa, CA or the greater Sonoma County area, schedule a no-obligation consultation with the Montgomery
Taylor Wealth Management team.


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