Business owners have a lot to think about. Not only do they have to run their business to ensure profit and growth, they also have to manage employees, benefits and taxes.
For many private business owners, planning for retirement (or the dream of retirement) becomes somewhat sidelined. Saving for retirement and ensuring funds are being managed correctly is often left out in the day to day routine, a new survey and study by BMO Wealth Management discovered.
“For many business owners, a retirement date is not always within their control, and the funds available for retirement can vary, especially if the owner was depending on either selling their business or continuing to draw income from the operating business,” BMO reported in the study.
The BMO study found that overall, the majority of business owners who participated (all of whom were based in Canada), are not financially prepared for the retirement.
- When asked how much they had saved toward their retirement, more than two-thirds (72%) indicated that they had saved less than $100,000, and only 10% indicated that they had saved more than $500,000
- Over 75% said that they were only able to save $25,000 or less
Another notable statistic from the BMO study found that 47% of private business owners plan to be over 65 when they retire – which will depend on their status including savings, exit plans, health and other factors. “There is a lot of fear and insecurity surrounding retirement for baby boomers who are worried about rising inflation, low interest rates, volatile stock market conditions, fears around another real estate bubble and concerns about social security and other entitlements,” explains Anthony Allen Anderson, VP of Sales and Marketing at GSI Exchange in Calabasas, California.
BMO says that the amount needed for retirement often depends on how much you plan to spend. Some in the industry have quoted $500,000 is needed for a comfortable retirement, which has many people worried — given their inability to save very much. BMO reported that almost three-quarters (70%) indicated that they drew out less than $50,000 annually and only 11% of business owners indicated that they were able to withdraw more than $100,000 per year.
BMO says $500,000 number can vary depending on many factors, including planned amount of spending each year in retirement; how much can be saved each year leading up to retirement; as well as current age and age at retirement.
Some of the challenges private business owners had in building a successful retirement plan were that many did not have a business succession plan. In fact, an overwhelming amount of respondents – 65% — said that they had no real idea what they might do with the business when they retired. Would they sell? Would they appoint a successor?
Many small business owners are beginning to think about how they can build a growing business with value after they leave the company and seeking working capital to fund this growth.
Some of the barriers to having an exit plan included finding a buyer or a suitable successor; the ability to valuate the business; too much dependence on the business owner’s leadership. “Retirement planning for private business owners can be complex, as it is necessary to have a business succession plan and a personal financial plan focused on retirement that work together,” wrote BMO in the study. “Both of these plans require a personal commitment in order to create an overall retirement plan that can be successfully achieved.”