Last week’s Wall Street Journal featured an inspiring story about entrepreneurs who can’t retire because they are unable to sell their business for what they think it’s worth. Unfortunately, it’s inspiring mainly as a case study of what not to do when you own a business or are self-employed.
The entrepreneurs interviewed for “The Economy Stole My Retirement” article blame the slow economy for their woes. And, of course, they are absolutely right in that the Great Recession dealt a serious blow to many businesses. But those setbacks needn’t mean a death blow for the owner’s retirement plans.
Over the years, we’ve seen entrepreneurs do it right. And, boy, have we seen them do it wrong. Here’s 5 things you need to know.
Don’t put all your eggs in one basket
One business owner in the WSJ story says “70% of his nest egg is tied up in” his business. If the business is Retirement Plan A, you better have a Plan B.
We know that entrepreneurs love to plow their money back into the business. After all, it’s their baby. But sometimes that closeness makes them lose perspective and common sense. Instead of plowing it back in, concentrate on taking money out each year and directing it toward marketable investments like stocks, bonds, and funds to diversify your holdings.
Hope for the best, plan for the worst
One client we worked with several years ago pooh-poohed the idea of saving outside of his business. Who needs a retirement plan, he said? His business paid him a lavish salary, and he planned to sell it for millions at retirement to support his younger, stay-at-home wife and small child. Independent business appraisals backed up his ambitious goals. But then disaster struck. Almost three-quarters of his revenue came from one corporate client, and when that client was taken over in a corporate merger, his business became near worthless. By then, he was just years away from retirement without enough time to catch up. Oh, and did we mention that whatever wasn’t tied up in the business was in real estate? Not a pretty picture.
This gentleman had more than enough cash flow each year to fully fund a retirement account. But he refused to do so because he just couldn’t “see the point of it.” The lesson? Things go wrong, so cover all the bases.
One owner profiled in the WSJ story says he “has struggled to sell (his) business … at a price anywhere near the $850,000 or so he figures he needs to stop working.” Unfortunately, last we looked, no one offers you a plum deal just because you need it. To attract those offers, the business has to be worth it. Be realistic about the true value of your business, and don’t turn down decent offers just because you “need” more.
Fund your retirement nest egg every year
Every small business owner should set up a small business retirement account and fund it each and every year. You can choose from several available plans, like a 401(k), Individual 401(k), SEP, or SIMPLE-IRA. Most are free to maintain, accommodate uneven cash flows, and allow employees to contribute (your financial advisor can help pick the plan right for you).
One of our professional clients is just about ready to retire, and in fact his business revenues are slowing to a trickle. But not to worry. He wisely saved each year while he was in practice, and his retirement nest egg is now fully funded, even without the sale of his business. That’s a perfect example of how to do it right.
Repeat After Me: Retirement Is YOUR Responsibility
One entrepreneur is quoted in the story as saying “Every dime is in the company. I have no alternative savings, except Social Security. And I certainly can’t live on that.”
OK, folks. Let’s review. You have a couple of choices here. Live with your kids in their spare bedroom. Eat Alpo. Buy a winning lottery ticket. Work at WalMart until you’re 90. Or better yet, understand that the only one responsible for your retirement is YOU and get to work.
We all hope you do sell your business, and for a lot of money. But just in case that doesn’t happen, how ’bout we work together to get started on Plan B?