Personal Wealth Planning for Business Owners

Business owners can tend to be financially vulnerable as they age. According to an SBA study, business owners are less likely to establish a diversified retirement portfolio than other people since they tend to reinvest cash into their companies, rather than put it aside for retirement.

That’s well and good, of course, if their businesses sell for enough money to provide comfortable nest eggs. But sometimes retiring business owners can’t find buyers or their companies don’t fetch the prices that were expected.

You are less likely to experience a retirement savings shortfall if you consistently take steps to build wealth a little bit at a time. Use these tips for wealth building:

  1. Build a business. It may sound basic, but many small business owners create jobs for themselves rather than build businesses they can ultimately sell. A business allows you to make money off your employees’ labor — not just create a revenue stream from your own efforts. A business has inherent value that can be sold to someone else after you decide to stop working. A business creates wealth you can use while you’re operating it and it is an attractive lending prospect for a bank. A business enables you to retire comfortably when you’re ready to do so.
  2. Establish retirement accounts. Some small business owners let worries about cost and complexity stop them from implementing tax-advantaged retirement plans. But saving for retirement doesn’t have to be difficult or costly. There are several types of retirement plans designed for small business owners, both with and without employees, that are simple to open and self-administering, without complex tax reporting requirements. If you have employees, some plans allow discretionary employer contributions. That means you won’t be obligated to fund the plan in years when your business income drops.
  3. Don’t raid your retirement savings. Business owners can be tempted to take money out of their pension funds to fuel expansion or get their companies through rough patches. The problem is that withdrawing retirement funds early means paying taxes on that money. It also generates costly penalties. And, of course, it reduces your nest egg that should be earning money for your senior years. Use money from your reserve fund, cut expenses, raise prices, or get a loan — these are all options to try before you even consider tapping your retirement money for business purposes.
  4. Use business savings to pay your taxes. One reason business owners turn to retirement savings is to pay taxes they haven’t adequately budgeted for. Set up a separate tax account, if necessary, to save money needed to pay federal income tax, self-employment tax (if you’re operating a pass-through entity like an LLC), and state and local taxes. If your spouse is employed, you can increase or decrease tax withholding from your spouse’s salary in order to manage your tax liability as a business owner.
  5. Remember family. Flourishing companies often provide income streams for extended family members over many years. But it’s important for those business owners to realize that reinvesting capital in their companies — at the expense of diversifying investment portfolios — can put a family fortune at risk if a business suffers a major setback or becomes obsolete. In order to hedge the risk of corporate failure, the liquid assets of family business owners should be invested in a diversified, conservative portfolio. Make sure that the investment capital is sufficient to fund a transition period for family members who rely on business income if there’s a drastic change in the company’s fortunes, particularly if the family business is highly vulnerable to market changes.
The views expressed by the author are not necessarily those of Fifth Third Bank and are solely the opinions of the author. This article is for informational purposes only. It does not constitute the rendering of legal, accounting, or other professional services by Fifth Third Bank or any of their subsidiaries or affiliates, and are provided without any warranty whatsoever. Deposit and credit products provided by Fifth Third Bank.