$14 trillion at stake: Why business owners should address succession planning and retirement together

Most employees in the United States have access to save for retirement through employer-sponsored 401(k) plans, using simple paycheck deductions and pre-selected investment options. But for business owners, in addition to setting aside funds, they must grapple with the intricacies of planning for both their personal retirement and the future of their business. That complexity may be one of the reasons that nearly 40% of small- to mid-size business owners don’t have a succession plan in place, despite plans by 75% of them to transition their businesses—worth nearly $14 trillion in business wealth—over the next decade (PDF).

For business owners, thinking about retirement means confronting difficult questions: What’s the value of their life’s work? Who are suitable successors? How can they extract their personal wealth from the business they own to enjoy retirement? Fortunately, a new retirement trend may help make it easier for business owners to consider both their succession plan and their retirement: phased retirement.

Phased retirement is simply when an individual gradually reduces working hours instead of stopping work altogether. It’s gaining popularity: According to the January 2024 Principal^® Financial Well-Being Index^SM, 52% of those still in the workforce prefer to retire gradually, with this preference even higher among millennials (56%) and Generation X (67%). The phased retirement trend is only expected to grow, with three out of four financial professionals and employers predicting that by 2030 most employers will have it as an option for their employees.

For business owners approaching retirement and contemplating a sale of a business, there are a myriad of financial, mental, and social benefits. Phased retirement can offer a smoother transition from full-time work to retirement. It may offer a sense of purpose after a lifetime of work, as well as the ability to share valuable legacy insights for a new owner during the ownership transition.

But phased retirement as part of succession planning requires careful and complex consideration of how the business will continue to operate and eventually transfer to new leadership. This is where comprehensive succession planning, from determining the value of the business to finding the right person and designing a plan to sell or transfer the business, becomes crucial. Navigating it can be daunting, which is why engaging a financial professional early is key.

For phased retirement to be part of succession planning, discussions should begin at least 5 to 10 years before an owner plans to exit the business. Steps include regular business valuations, potential successor identification, and a structured transfer plan. By proactively addressing both phased retirement and succession planning, business owners can help ensure a successful retirement and smooth transitions for themselves, their employees, and the future of their companies.