How much money do you need to retire as a business owner? You may think the sale of your business will fund your retirement, but will that be enough? Here’s what you need to know.
Small business owner? Hoping to retire someday? Just like anybody else, the action steps for reaching that goal have to start as early as possible. Ideally, decades before you reach your 60s or whatever age you hope to say goodbye to the workforce.
Next question: How much will you actually need to retire? Your numbers aren’t any different from a life-long employee of corporate America but your path to the goal might be significantly different. Let’s look at some factors.
Sell Your Business
You have something that many potential retirees don’t have: A business that you can sell to fund your retirement but let’s camp out on this one for a while because selling your business for a significant amount is going to involve some strategy and possibly a rethinking of your business model.
Watching financial media might give you the idea that you build a business and later sell it for millions or billions of dollars, but most small businesses sell for far less. The businesses that do sell for a lot of money first groomed themselves to be acquired.
How do you set yourself up to sell?
Make yourself dispensable- Nobody wants to buy a business built around an individual. If you’re a well-known cake decorator and everybody thinks YOU’RE amazing, you have a problem. Nobody would buy your business because if you leave, there’s no business. How will you make yourself able to walk away?
Look at your numbers- Are you profitable? Are your books complete and easy to understand? Do you have years of stable sales and growth?
Documented Processes- Will the new owner be able to take over without having to learn everything from the beginning?
Diversified Customer Base- You can’t sell a business that survives on 1 or 2 big clients. What happens if they leave during the transition?
You can find plenty of articles about making your business sellable but if you hope to get enough money to fund your retirement, make it as sellable as possible. The truth is that few people get as much for their business as they believe they should. Understand how others will calculate the value of your small business. And, don’t rely on the sale of your business to fund all of your retirement.
You need to plan for retirement by putting money aside in an investment that is not tied to the sale of your business. One way, no matter how big or small your business, is to start a 401(k). If you have employees, there are laws that require you to make the plan available to them as well. An IRA is unlikely to allow you save enough to reach your retirement goal. There are other tax-advantaged accounts you might look at to help you save enough but the 401(k) is the best known.
Build Retirement into Your Pricing
Don’t make the mistake that so many small business owners make. When you purchase from other companies, it’s likely that some fraction of a percentage of the purchase price goes toward funding a portion of the retirement of all employees at the company.
You should do the same thing. Calculate how much you will need once you reach retirement, figure out how much you will contribute monthly to reach that goal, and work that number into the price of your goods or services. It will likely be such a small amount that customers won’t notice a meaningful increase but if you’re not intentionally funding your retirement each month, you won’t reach your goals.
How Much Money Do You Need for Retirement?
The answer may be a lot more than you expect. It depends on a lot of different variables, especially if you’re a business owner. There are many calculators and formulas you can find online, but the best way to get a meaningful number is to meet with a financial planner and let them calculate the numbers based on your personal circumstances and the data you provide to them.
What we can say for sure is that people are living longer. According to the US Social Security Administration, a man who reaches the age of 65 today will live on the average to the age of 84.3. A 65-year-old woman can expect to live to 86.7.
You will probably need at least 60% to 80% of your current income each month – or more, depending on your lifestyle and where you live. Health insurance alone will be a big and ongoing cost. One retiree and business owner we spoke to recently said that the combined cost for Medicare and Medicare Supplement Health Insurance for her and her husband comes to over $1,000 a month.
If you’re currently living on $60,000 per year, 70% would be $42,000 before factoring inflation into the mix.
Currently, the average monthly Social Security check is $1,294. That helps, but it doesn’t go very far when you add up all your expenses. Your monthly expenses may include these and other items:
- Health insurance
- Real estate taxes
- Rent or mortgage(if you haven’t paid off your mortgage
- Home insurance
- Utilities (gas, electric, oil, cable, Internet)
- Food and other necessities
- Car payment if/when you need to replace your vehicle
- Car insurance
- Income taxes (Social Security Income is taxable for most folks)
To determine how much you will need to retire, you need to have an accurate summary of what you spend now for your basic needs as well as how much money you might need to travel or do other things you’d like to do in retirement. Take that information to your financial planner and let him or her help you set your retirement savings goals and understand what you’ll need to do to reach them.
Disclaimer: Remember what we said—these are very general numbers but what we know for sure is that you can’t rely on the sale of your business to fund all of your retirement. Betting on your future income to fund retirement is a fool’s game. Anybody who has lived long enough knows that the future is often nothing like we believed it would be.
Don’t be scared of the future but think about how you can intentionally start saving for retirement. Yes, margins are tight but this is too important to ignore until the business gets more solid and reliable.