When it comes to retirement planning, one might think that small business owners are among those better prepared for their golden years than rank-and-file workers. Alas, that’s not necessarily the case for a solid majority of the entrepreneurial class.
Nearly 7 in 10 (68 percent of) small business owners ages 45 to 64 polled in a BMO Wealth Management survey say they have retirement savings of less than $100,000. Only 11 percent of respondents in this age range can claim savings of more than $500,000.
Part of the problem for small business owners is a lack of planning on an interrelated issue: how and when to the exit the company.
“Retiring from your own business can be difficult after having invested the better part of your working years to achieve success,” the report notes. “For many business owners, a retirement date is not always within their control. And the funds available for retirement can vary, especially if the owner was depending on either selling their business or continuing to draw income from the operating business.”
Most are depending on the former — but doing little about it. When asked if they have an active business succession plan to help sell, transfer or wind down their business, nearly two-thirds (65 percent) of the small business owner surveyed say they don’t. Equally concerning: Just 9 percent of respondents had an up-to-date, written plan.
Even among the pre-retirement crowd (business owners between ages 45 and 64), the figure caps at 10 percent. Only one-fifth (20 percent) of all the poll respondents acknowledge having an informal, unwritten business succession plan.
The lack of planning can be particularly consequential for business owners because of tax issues. As LifeHealthPro contributor David Stone noted in a July 28 article, the type of sale will determine the amount of tax paid on reportable income from the transaction — tax that can take a hefty chunk out of a nest egg.
To boot, the business’s value to a prospective buyer may not be as much as the owner is hoping for. Some reasons why: a lack of steady cash flow; weak or inconsistent demand for the products or services on offer; or a lack of talented executives to keep business operations humming during and after a transitional period.
Hence the need for personal savings independent of value tied up in business to fund ongoing retirement needs. On this score, the BMO survey results are concerning, especially in respect to those closer to retirement.
Most small business owners surveyed by BMO Wealth Management (55 percent) estimate the value of their company at less than $500,000.
The problem isn’t necessarily overspending that cuts into retirement savings. When asked how much in income they’re drawing from their businesses to support personal expenses, just over three-quarters (77 percent) say they take out $50,000 annually. Fewer than 1 in 10 (8 percent) of business owners withdraw over $100,000 per year.
How much do the owners think they could get today for their companies? A majority of those surveyed (55 percent) estimate the total at less than $500,000. Just 13 percent pegged the value $1,000,000-plus — almost enough to fund a 25-year retirement.