Leverage your business for your retirement future
A key issue for many of us is whether we will have enough income in retirement.
You don’t have to look very hard to find articles providing advice on how much we should invest in 401(k) plans, IRAs and other investments, along with how to draw down these type of accounts in retirement.
For many closely held business owners, a key component of their retirement income will come from their largest asset — their business.
Much like my grandfather who told me when he retired from farming, “my land is the majority of my retirement plan,” business owners also view their business as their retirement plan.
My grandparents had a very comfortable retirement leveraging the land to generate an income stream that more than met their retirement needs. But in order to ensure that ‘intent’ becomes reality, business owners need to look at how they will leverage their business to generate retirement income, while many times also ensuring the business can remain a going concern.
There are a variety of paths for business owners, however some common options include:
- Selling the business and reinvesting the proceeds
- Selling the business by utilizing an installment sale
- Selling the business to an Employee Stock Ownership Plan (ESOP)
In the end what works the best for any specific owner will depend on the owner’s particular situation and retirement objectives.
A common technique to help ensure a successful business transition is for owners to enter into a buy-sell agreement with co-owners, family, key employees or an outside party.
Our Advanced Solutions team has reviewed over 700 buy-sell agreements over the last few years. Surprisingly, only 23 percent of the buy-sell agreements we reviewed have specific provisions geared towards business owner retirement, and only 12 percent include mandatory provisions for retirement.
Even though retirement income is a high priority for many business owners, there is a disconnect when it comes to how retirement triggers are addressed in many buy-sell agreements.
In many situations, the agreement was drafted well before retirement was a priority.
Business owners should have their buy-sell agreements reviewed every few years, or when major changes occur with ownership, or to the business, to make sure the retirement provisions as well as other provisions match up with their current goals and objectives.
The goal is for business owners to be able to say with confidence “my business is a key component of my retirement plan,” by taking the steps needed to make that a reality.
Insurance issued by Principal National Life Insurance Co. (except in NY) and Principal Life Insurance Co., members of the Principal Financial Group®, Des Moines, IA 50392.