Retirement isn't looking so golden for many small business owners in Canada. More than three-quarters of small business owners don't have retirement plans in place for themselves or their employees, according to the Canadian Federation of Independent Businesses.
Considering that the majority of small business owners in Canada are over the age of 40, it's critical they take these steps to start saving now in order to realize their dreams of retirement.
1. Recruit a team of financial and legal experts. It's never too late to start saving, but with less time to build your nest egg you will need to consider less risky investment options. Work with trusted professionals including a financial adviser, lawyer and insurance agent specializing in small business to help design tailored solutions based on your personal and professional circumstances.
2. Draft a pre- and a post-retirement budget. It's impossible to project how long someone's retirement funds will last without understanding their retirement income needs. What age do you plan to retire? How much do you anticipate your business will sell for? What if it sells for $100,000 less than hoped? What if you only want to step away partially from the business?
Small business owners should work with their financial advisers to plan for any scenario imaginable. It's also important that these budgets be revisited every 3 to 5 years to stay on track to meet retirement goals. For those just starting up their small businesses after age 40, you may need to redefine your retirement expectations.
3. Develop a succession plan. All owners will need to exit their business at some point. It's inevitable. Even if retirement is not on the horizon, take the time to formalize your succession plan to ensure you're making the right decisions for you and your business. If the business has more than one owner, engage an insurance professional to develop a buy/sell agreement. Losing a key member of the business, without the financial means to continue the business activities, could easily derail retirement plans.
4. Explore all investment options. One cannot ignore the benefits of investing in an RSP, but RSPs may not be for everyone. In order to invest in an RSP, business owners need to show T4 income. However, many small business owners prefer dividends to salary, eliminating the option to invest in an RSP.
A Tax-Free Savings Account (TFSA) is a good way to complement your retirement savings. Contributions grow tax-free and any withdrawals and investment income earned from a TFSA is also tax-free.
Another investment vehicle to consider is an Individual Pension Plan (IPP), a good option for aggressive targets as it forces the company to make contributions. With an IPP, all contributions and interest earned are tax deductible.
5. Consider the benefits of a holding company. Creating a holding company may be the best bet for those over 40 seeking an aggressive savings strategy. The holding company can take in excess profits during working years and provide tax efficient income whether you pay yourself regular dividends or capital dividends–both of which are more tax efficient than taking money out of RSPs. Additionally, holding companies give the business owner full control over the retirement income amounts and payment frequency compared to RSPs which, when converted to RIFs, have a firmly set withdrawal schedule.
6. Should you be paying into CPP? Speak with an adviser about whether you should be paying yourself out via salary or dividend. Salaries are subject to the CPP while dividends are not. Depending on your pre- and post-retirement budget goals, it may be beneficial to keep those funds in the company rather than pay into the CPP.
7. Don't bank on the sale of the business funding your retirement. Gambling your retirement dreams solely on the sale of your business is a huge risk. What if you can't sell it? Or what if it takes longer than anticipated to find the right buyer, delaying your dreams of retirement? To reduce the risk of missing retirement goals, investment diversification is essential.
Paul Shelestowsky, CFP, is a senior wealth adviser with Meridian Credit Union, working out of the Niagara-on-the-Lake region.