Retirement planning can be more complex for small business owners, and it has been especially so amid the pandemic. Many businesses have struggled to survive during the lockdowns and some owners have made the difficult decision to close permanently, putting their retirement dreams in jeopardy.
“The pandemic has affected business owners in different ways, some more than others, depending on their business models and how close or far they are to retirement,” says Heather Holjevac, a financial planner at the Holjevac Financial Group in Mississauga.
That’s especially concerning as most small business owners see their businesses as their main source of retirement funding, she adds.
Dharam Vijh was forced into retirement earlier this year when he made the decision to close his Toronto restaurant, Stratengers Restaurant and Bar, because of the dramatic drop in sales caused by the pandemic-related lockdowns.
“I was making money and having fun,” says Mr. Vijh, 66, who co-owned and operated the business for 33 years with his brother Anil, 63.
Mr. Vijh was hoping to retire in the next three to five years, but began planning his exit strategy after the second lockdown took hold in November 2020, with the help of a financial advisor and accountant. With his savings depleted and about $140,000 in loans and lines of credit, he didn’t want to keep pumping more money into the business.
“Over the years, I’ve experienced several periods of slowdown in business, for instance during SARS [in 2003], but quickly recovered. But at age 66, I don’t have the time to recover,” he says.
The pandemic has been difficult financially and emotionally on many small business owners, says Alim Dhanji, a senior financial planner at Assante Financial Management Ltd. in Vancouver, including for some of his clients. They include physiotherapy clinic owners, professionals such as doctors and lawyers, and hotel owners.
While many physiotherapy clinic owners were only shut down for a few weeks at the start of the pandemic, those in the tourism industry have very little revenue coming in due to the ongoing travel restrictions.
Large business owners typically have cash reserves and lines of credit they can draw from in emergencies, but small business owners often have to rely on loans and maybe even personal savings to stay afloat, Mr. Dhanji says. Also, many don’t have a pension and little or no savings in investment vehicles such as a registered retirement savings plan (RRSP) or a tax-free saving account (TFSA) to fall back on for retirement.
For many small business owners who are approaching retirement, like Mr. Vijh, the pandemic was the catalyst to do it early, even if it wasn’t their first choice.
“It’s not a nice thing to be forced into retirement,” he says.
Mr. Vijh has yet to assess the full financial impact of his unplanned retirement. He has cash reserves, including an RRSP and a TFSA. However, he was forced to stop contributing to each of those during the lockdowns and instead drew down on his cash reserves.
Still, Mr. Vijh is fortunate. His wife has a good job and the family was able to maintain an income, and he and his brother were able to find a buyer for the restaurant following their decision to retire and close it down – despite the difficult economic conditions.
Unforeseen events such as the pandemic have underscored the need for business owners to have a financial plan that considers various business cycles.
As such, now is the ideal time for business owners to revisit their plan and “redefine their path to retirement” before businesses re-open fully, Mr. Dhanji says. “They should look at different scenarios given uncertainties created by the pandemic.”
Ms. Holjevac says small business owners need to take a hard look at their companies and determine if their existing business models are still viable. If not, they should consider what changes could be made to increase or at least normalize revenue.
Mr. Dhanji adds that “it’s important [for small business owners to] look at all possibilities so that they can be better prepared to execute their plan when the opportunity arises.”
He’s currently advising small business owners to develop a budget based on new revenue projections, bearing in mind that it can take some time for revenue to return to normal. One approach they should consider during these circumstances is to look for ways to cut costs.
“It might be necessary to make sacrifices,” he says.
If business owners have run up debt and cut back on their retirement savings, he says they should include debt repayment and savings as part of their budget.