Entrepreneurs tend to be hard-working, independent-minded people who are so focused on developing and managing their enterprises that they actually might be putting their retirement at risk by deferring personal savings and investments and putting too much emphasis on the equity in their business to fund their retirement years.
A recent poll by TD found that while the majority of Canadian small business owners polled who plan to sell their business will use the proceeds to fund part of their retirement, 14 per cent say they are counting solely on the sale of their business to fund their entire retirement.
This could be a risky strategy.
"While the equity in your business could potentially be a significant source of retirement income, it's equally important to make regular contributions to build your personal investment portfolio, both as a safety net and to maximize retirement income," says John Tracy, a senior vice president at TD Canada Trust. "Entrepreneurs should consider balancing the high risk investment strategy of a small business with other investment products like mutual funds or GICs."
Retirement for entrepreneurs generally is a more distant concept than it is for paid salaried employees. A survey by Investors' Group found that almost 40 per cent of business owners plan to work until they are in their seventies and 14 per cent say they will never retire. Another 27 per cent expect to exit the workplace between ages 65 and 69.
At some point or other, even entrepreneurs either have to retire or sell or pass on the businesses they've worked so hard to create and need a sustainable income to live on.
Tracy has some tips on how entrepreneurs can plan for a comfortable retirement and grow a small business simultaneously.
Without a guaranteed private pension, a Registered Savings Plan (RSP) still is one of the best savings and investment vehicles available for small business owners.
"Take advantage of the benefits of tax-deferred and compound growth that an RSP offers," Tracy recommends. "It can be daunting to find a chunk of money to contribute to your retirement savings each year. Start small and set up a pre-authorized transfer that automatically transfers a set amount at regular intervals into your RSP."
Small business owners who draw only a small income from their businesses should consider contributing to a Tax Free Savings Account (TFSA). It's flexible, there's no tax payable on any investment or income growth and, depending on the type of investment, funds can be withdrawn and then reinvested later.
Business owners also should consider using income-splitting strategies to boost their family's retirement savings.
"If you hire your spouse you can effectively split income among family members," Tracy says. "This strategy allows you to shift income to family members in a lower tax bracket, reducing you family's overall tax bill."
"Alternatively, consider having a lower-income family member make the RSP contribution," Tracy says. "Choose a family member whose taxable income is low but is expected to increase in the future. Then defer deducting it until the income increases, netting a larger tax benefit."
As well, consider issuing dividends to fund your RSP contribution. Unlike money paid as a salary, bonus or commissions, dividends often are taxed at a lower rate, allowing for great year-end RSP contribution room. Any tax refund realized as a result of the RSP contribution can be funneled back into investments.
Retiring is difficult for most entrepreneurs. According to the Investors Group survey, 60 per cent of business owners/operators still want to be involved after they retire either as a financial advisor or mentor, a consultant or a member of the organization's board of directors.
Regardless, they should get some expert advice.
"A small business advisor at your bank can help you develop a financial plan to build a thriving business today and your financial advisor can help you develop an investment plan for a comfortable retirement in the years ahead," Tracy says.
Talbot Boggs is a Toronto-based business communications professional who has worked with national news organizations, magazines and corporations in the finance, retail, manufacturing and other industrial sectors.
