Christina Florencio became an entrepreneur during the pandemic, and she’s learning that business planning also means planning for retirement.
“We planned our business, Urban Tree Products, to provide products that meet three criteria: they’re sustainable, long-lasting and recyclable,” says Mr. Florencio, 45, who is based in Vancouver and markets online.
“All the planning to launch the business meant that I delayed my retirement planning. I reminded myself that I would like to retire at 55, and that’s only 10 years from now.”
She’s hardly alone. A survey published online by Benefits Canada earlier this year found that nearly half (47 per cent) of Gen Z respondents are unsure whether they’ll have enough saved for retirement, while 30 per cent said they will not have enough, and just 23 per cent believe they will.
The situation can be even more complicated for entrepreneurs. In many cases, business owners don’t have pension plans to rely on, and the rigours of building your own company can leave little time to formulate a retirement strategy.
“Growing a business and thinking about retirement are two concepts that are difficult to manage at the same time,” says Sandra Foster, a certified financial planner, author and president of Toronto-based Headspring Consulting Inc. “Many entrepreneurs delay their retirement planning because their identity is linked so tightly to the business they are building.”
Toronto financial planner and lawyer Elke Rubach, who is also president of Rubach Wealth, agrees that business owners can be distracted.
“I think a lot of entrepreneurs delay their retirement planning because they’re throwing everything into their business. You put all your energy, drive and passion into your business, and you don’t think about anything else,” she says.
“Another reason is that you sometimes don’t have time for retirement planning.”
As an entrepreneur, Ms. Florencio knew she needed help to get on track. “I realized I was going to have to work with someone to create a plan,” she says.
She contacted a financial adviser she had worked with before she was self-employed to develop a new strategy to reach her goal of retiring at 55.
“We arranged it so I make withdrawals from my bank account every month, with the funds going toward my retirement. I needed help from my adviser organizing the automatic withdrawals. I actually had started saving for later when I was in my 20s, but I kept withdrawing the money and spending it,” she explains.
Having a good adviser is important, Ms. Rubach says. “You need someone who can pull you aside and ask you what thought you have put into your retirement.”
Ms. Florencio says she found that her planner also helped her create a realistic budget, so she can save for retirement without starving her business or making her lifestyle unbearable.
“She helps me create a vision for what I want my retirement to actually look like when I reach 55,” Ms. Florencio adds. “It’s much easier to save if you have a vision. My vision isn’t to retire to do nothing when I’m 55, but to do ‘passion projects’ – projects that interest me and where I help other people.”
There can be a difference in retirement strategies by entrepreneurs depending on their age, Ms. Foster says. For example, if the entrepreneur is older, say 50-plus, the business is incorporated and the entrepreneur has been drawing salary from the corporation, the owner can consider setting up an Individual Pension Plan, she explains. An IPP is like a defined benefit pension plan for business owners and incorporated companies.
“The ideal situation varies and requires actuarial advice but it can be beneficial if the individual is close to 50 and under 72,” she says.
Entrepreneurs should also look at investing in Tax Free Savings Accounts (TFSAs) and Registered Retirement Savings Plans (RRSPs) or both, Ms. Foster adds. Which account to use depends on each person’s situation: RRSPs can be helpful for those who expect their income to drop after retirement, she explains. TFSAs allow you to withdraw funds later on a tax-free basis.
Many entrepreneurs hope that they will fund their retirement by selling their business. This can work out better for some business owners than others, planners note.
“It can depend on whether you’re building your business with the idea of selling it eventually or whether you hope to transfer it to the next generation in your own family,” Ms. Rubach says. In the early stages of a business the founders may not know yet, because they’re not sure how successful the business will be, she explains.
It’s challenging to determine the amount your business might yield if sold, Ms. Foster says. “Often entrepreneurs don’t have a realistic value of what their business is worth, or they don’t know how to market their business or who might buy it.”
Many businesses never find a buyer or obtain the price they thought their business would be worth.
Planners also say insurance and effective will and estate planning play an important role in an entrepreneur’s situation. There is always the risk that if they die, their survivors could be left in a position where the business must be sold, tax must be paid on the deemed disposition of the person’s assets upon death, and a buyer must be found.
Life insurance can help to bridge that gap. Disability and critical Illness insurance can also be important pieces of an entrepreneur’s financial plan to ensure there is some income if they are unable to work.
Ms. Florencio advises entrepreneurs to start planning early. “My advice to other entrepreneurs is to get going and diversify your investments,” she says. “Many of us are going to live longer than earlier generations and we’ll have longer retirements.”