As a small business owner, you have so many tasks on your plate: perfecting your product/service, cultivating a great team, getting your name into the community, paying the bills, and so much more.
With all of these critical responsibilities, most owners forget to think about and plan for their retirement.
Today, we’re going to shed light on the importance of building a retirement plan and the surprising tools that can help facilitate it.
Why Small Business Owners Need A Retirement Plan
For many business owners, their most significant asset tends to be their business, meaning their net worth (and human capital) are primarily tied to that singular asset. In fact, according to a CNBC business succession survey, 78% of small business owners plan to sell their business to fund 60-100% of their retirement.
This fact puts business owners in a unique financial and personal position when planning for retirement. Below are several reasons why small business owners benefit from a personalized retirement plan:
Business owners have concentration risk as most of their net worth is tied to their company.
Business owners often don’t have as many liquid investment assets outside of their business.
Their liquid assets tend to suffer from a lack of diversity.
A retirement plan safeguards the founder from volatile business environments.
In addition, there will come a time when you’ll want to step away from the company’s day-to-day functions, at least in a full-time capacity. Once you reach this point, you’ll want a foundational plan to help guide you in the right direction.
The Difference Between Retirement and An Exit Strategy
The truth is that your business requires a robust and intentional plan to help it thrive when you no longer wish to own it. In a recent article, we dove into the top ways founders can create an exit strategy and why it’s critical to the business’s long-term success.
Your exit plan centers on the business, but your retirement plan centers on you. Therein lies the critical difference between the two.
A strong exit plan is undoubtedly part of your overall retirement plan, but it isn’t the entire picture.
Once you no longer own your company, what will your retirement look like?
How Behavioral Finance Can Help You Prioritize Your Retirement
Let’s face it: retirement is challenging to picture.
Since it seems so far away, it’s difficult to adjust present-day habits to optimize for that future time.
When working with small business owners, we help our clients prioritize their long-term wants and needs. From a behavioral standpoint, this isn’t easy to accomplish.
The study of behavioral finance provides some clarity around why that is. Behavioral finance digs into the “why” of decision-making, behaviors, and habits concerning money and offers fascinating insights into how you approach money.
Hyperbolic Discounting and Conceptual Priming
A specific term that can explain why saving enough for retirement is a significant roadblock is hyperbolic discounting. Hyperbolic Discounting refers to the tendency to value immediate, though small, rewards more than long-term larger rewards.
This human behavior could significantly influence your retirement plan—why save for retirement when you can reinvest more funds into your business, for example—which is why we try to help our clients visualize and prioritize their retirement.
Why does visualizing your retirement plan matter? Behavioral finance experts coined another special term, conceptual priming, to help bring more context. The idea is to envision your future self to better align, empathize, and connect with your future self.
By doing so, your present-day actions can better align with your ideal future. The more vivid and detailed, the more motivated people are to save to achieve it. One exciting study applied conceptual priming via virtual reality to see the impact on retirement savings.
For more details on how behavioral finance can help optimize your financial decisions, we wrote an article on some of the basics.
Set Concrete Retirement Goals For Yourself And Your Business
Once you understand why it is so essential to have a retirement plan, now it’s time to put yourself into the shoes of your future self as much as possible. It’s when you can do this that your retirement plan begins to take shape.
Start asking yourself some questions:
What do you want your business to look like?
Do you want to remain in a consulting capacity?
Would it make more sense to be a member of the board?
What do you want the next phase of your life to be about?
How do you want to spend your time?
What brings you fulfillment and joy?
By taking the time to answer these questions, you can get a better sense of what you want for your retirement and how your small business can help you achieve your goals.
After you find clarity there, you will want to set SMART goals.
Specific: I want to retire in 5 years, sell the business to my child, and remain in a part-time consulting role.
Measurable: I expect the business sale to supplement 40% of my retirement.
Attainable: We have a 95% client retention and plan to roll out more sophisticated service offerings to increase rates.
Realistic: Current and projected profits support the future sale price.
Time-Bound: I’ve built out a 5-year succession plan to transfer ownership to my child.
SMART goals help you think more critically about what you want and provide the space to mold a concrete plan.
Align Your Wealth With Your Goals
A comprehensive financial plan helps to amalgamate your wealth and your goals. By ensuring this alignment, any small business owner will be in a much better position.
It’s essential to create a plan so that you and your business are well taken care of now (and in the future).
Craig Toberman is the Founder of Toberman Wealth – a fee-only financial advisor based in St. Louis. He assists families and businesses with strategic financial planning and long-term wealth management. He has over a decade of experience in financial services and has crafted custom financial plans for hundreds of families and businesses.
Craig received a Bachelor of Science (B.S.) degree in Agricultural and Consumer Economics from the University of Illinois and a Master of Business Administration (M.B.A.) degree in Finance from Saint Louis University. He is a Certified Financial Planner (CFP), Chartered Financial Analyst (CFA) charterholder, and Certified Public Accountant (CPA).
Craig is a member of the National Association of Personal Financial Advisors (NAPFA), Fee-Only Network, and XY Planning Network.
Craig lives in the greater St. Louis area with his wife, Ally and son, Hank.