Small business owners make complex decisions on the road to retirement. Should they contribute to RRSPs and other savings vehicles? Or focus on pumping money into their companies?
There's no one-size-fits-all answer, but financial advisers agree that entrepreneurs need to take a holistic approach to planning.
"We divide the topic into two categories: a personal financial plan and a business ownership transition plan," says David Wilton, director, small business banking, for the Bank of Nova Scotia. "You have to ensure [the two plans]are working together."
But the high rate of failure for small enterprises makes it even more important for owners to be guided by a team of advisers that includes financial, legal, accounting and tax specialists, says Peter Andreana, a certified financial planner and partner with Continuum II Inc. in Burlington, Ont.
A solid plan will ensure the owner is financially sound with or without the business, and that the business can continue on without the owner, if necessary.
The experts agree that one of the biggest mistakes entrepreneurs make is not paying themselves. This includes putting money into RRSPs, which can help business owners handle any business volatility and provide important tax advantages. For instance, RRSP contributions for unincorporated businesses are deducted right from the owners' income, resulting in a lower tax rate. For 2010, the maximum allowable RRSP contribution is $22,000.
"There could be the odd occasion where the business needs some help and they don't have additional dollars to put toward an RRSP, but that should be an anomaly," adds Mr. Andreana.
Trent Savinkoff, a small-business adviser at Royal Bank of Canada in Spruce Grove, Alta., says other valuable sources of retirement income can include:
• Individual pension plans funded by the company, so they can be written off as a business expense and thus won't have personal tax implications.
• Tax-free savings accounts (TFSAs).
• Real estate equity.
• Non-registered savings.
One of Mr. Savinkoff's clients, Glenn Staines, president of Umbra Engineering Ltd., a six-employee operation based in Edmonton, says RRSPs are so important in his retirement goals that he contributed $16,000 late last year in one lump sum. "I think they're a necessity. You have to have your own safety net," he says.
Mr. Staines also has a vested pension after years of working for someone else, a few stocks and the nearly three-year-old business he helped found. Now 54, he is looking to sell his share of Umbra to employees or an outside interest when he's in his early 60s.
But Mr. Staines adds that whether he leaves Umbra completely depends on the economy and inflation, the spiralling cost of putting his two children, ages 11 and 14, through post-secondary school.
"Because we're such a young company, it takes time to build its value, so I'm looking at investing 10 years into it before it's in a position to be sold," he says. "And depending on how my company does in the next seven years, I will decide if I'm active in it or not."
A large proportion of Canadian small business owners don't plan to cut themselves off entirely from their companies past the age most people retire, which in Canada averages 62. According to 555 small business owners surveyed recently by Angus Reid, about 70 per cent said they still planned to play a key role in their companies post-retirement, either to keep busy or use it as a key source of income.
The study, conducted for American Express, also noted that less than half of those surveyed had savings such as RRSPs, 30 per cent expected to use profits from their ongoing association with their business, and 27 per cent planned to sell their companies.
Those planning to keep the business in the family need to consider tax-effective succession plans, experts say, including determining whether you should continue to own dividend-paying preferred shares that could give you some income, based on the company's earnings, after retirement.
Selling a business has to take into account the cost of "maximizing its transferable value," notes Mr. Wilton.
"You have to demonstrate to a buyer that you've created a system that will exist in the future, and you can do that by locking down customer contracts and employment contracts with key employees, and locking down supplier agreements that are sustainable in the hands of the new owner."
By the numbers
A survey of 555 small-business owners across Canada gave these views on retirement:
-30 per cent expected to fund their retirement at least in part with profits from their ongoing businesses; 27 per cent planned to sell the businesses to fund their retirement.
-50 per cent wished they could retire tomorrow, but only a third have everything in place to do so.
- 48 per cent have savings such as RRSPs that could help them finance retirement, while 22 per cent have formal retirement plans in place.
-70 per cent planned to play a role in their businesses after retirement, 30 per cent planned to maintain an ownership interest, 41 per cent planned to work part time.
-17 per cent planned to retire before age 60, 40 per cent between 60 and 65, and 34 per cent after 65; 8 per cent don't expect to retire at all.
- 40 per cent were forced to delay retirement because of the recession.
Source: 2010 American Express Small Business Index SurveyReport Typo/Error
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