It goes without saying that small business owners are master multitaskers. Often wearing several hats and juggling dozens of day-to-day responsibilities, they can lose sight of their retirement goals.
Without the luxury of a company pension plan, small business owners must be proactive in building a stable retirement nest egg. According to the recent Small Business Banking in Ontario Study conducted by Meridian, 20 per cent of the province’s small business owners stay up a night worrying about how they will save for retirement.
The following ten tips are designed to help small business owners fulfill their retirement dreams:
1. Start now. Retirement planning is important for everyone, but small business owners are often guilty of funnelling all of their energy, time and resources back into their business. As a result, their future – which includes a sound retirement plan – is put on the back burner. Saving for retirement is a marathon not a sprint, so starting to save as soon as possible is vital.
Your business succession plan is part of your retirement plan. While a succession plan is one aspect of your retirement plan, it should never take the place of a holistic retirement plan. Similar to planning for retirement, creating a succession plan shouldn’t be put off until the eleventh hour. Even if retirement is decades away, take the time to formalize your succession plan to ensure you’re making the right decisions for you and your business.
3. Understand your sources of retirement income. Many small business owners make the mistake of thinking that the sale of their business will fund their retirement. But what about the owner who decides she wants to pass the business down to a family member? Or what happens when the value of the business depreciates due to unforeseen circumstances? Retirement income from government sources such as Canada Pension Plan or Old Age security may not be enough to fund your dream retirement.
4. Assemble a team of trusted experts. Working with trusted professionals including a financial advisor, tax specialist and lawyer will help you better understand your options and tailor solutions based on your full personal and professional financial picture.
5. Respect the RRSP. Investing in an RRSP makes sense for all Canadians – not just small business owners. Making an RSP contribution can reduce the amount of income tax you pay in the year and the investment growth is tax-deferred. The deadline to make an RRSP contribution this year is March 3rd.
6. Consider a TFSA. For small business owners who typically max out their annual RRSP contributions, a Tax-Free Savings Account (TFSA) is a great way to complement their retirement savings tax-free. Introduced by the Federal Government in 2009, a TFSA is a savings vessel that allows contributions to grow tax-free. Any withdrawals made from a TFSA and any investment income earned is also tax-free. Individuals can contribute up to $5,500 a year into a TFSA.
7. Make it automatic. Pre-authorized contribution plans (PACs) are a great tool for contributing to Registered Saving Plans or Tax-Free Saving Plans. Most financial institutions provide pre-authorized contribution plans (PACs) that automatically transfer funds from your chequing account into your savings investments on a regular basis.
8. Prepare for the unexpected. Having a fulsome retirement plan includes preparing for any roadblocks along the way including illness or disability. Work with a trusted professional to ensure you have the right life and disability insurance requirements in place.
9. Have a tax strategy. There are a variety of tax implications that small business owners need to be aware of when planning their retirement. For instance, if you’re planning on selling your business you may be eligible for a $750,000 capital gain exemption. Again, working with a trusted tax professional can help you better understand all the tax implications of being a small business owner.
10. Revisit and refresh. Life throws curve balls so plans should never be written in stone. Make sure to meet with your team of experts on a regular basis to review your current retirement and succession plans, check on your progress and course correct if need be.
Jeff Brown is the vice-president of delivery initiatives and business integration at Meridian, Ontario’s largest credit union.
Editor's Note: An earlier version of this article mentioned being eligible for a $500,000 capital gain exemption. This story has been amended to show that exemption is $750,000.