Retirement planning for small business owners
Winter 2005
The secret to achieving your retirement goals is to take a holistic approach
Creating a retirement savings plan can be considerably more complex for small business owners than for other people, because there is more to think about. Small business owners need to consider multiple sources of retirement income, special tax considerations, and succession issues when building a retirement plan.
Undoubtedly, the best way to tackle retirement is to take a holistic approach. This means considering both your personal finances and your business finances - and how the two can work together to help you reach your retirement goals.
To begin, take stock of your potential sources of retirement income. Government and other pension plan payments are only a starting point. Potential sources might also include insurance and equity in real estate. To support your desired lifestyle, most of your retirement income is likely to come from other sources, including:
- the equity in your business
- Registered Retirement Savings Plans (RRSPs)
- non-registered investments
Equity in your business
Many entrepreneurs assume that their business will fund a substantial portion of their retirement. The 2004 CIBC Small Business Outlook Poll, conducted by Decima Research, revealed that small business owners plan to draw from multiple sources to fund their retirement. Selling their business accounted for nearly one-third (31%) of their planned income, with 28% expected to come from RRSPs, 25% from other investments, and 16% from pensions.
In any sale, remember that tax considerations will play a key role. Special tax implications, which apply to the disposition of small business shares, can make tax strategies especially important for entrepreneurs as they plan for retirement. If your business is a qualifying Canadian small business corporation, you may be eligible for a $500,000 capital gains exemption on the sale. You should seek the advice of a professional tax practitioner to structure the sale as advantageously as possible.
There are many situations, however, when selling the business may not be practical or may not be the best financial choice. Many business owners look forward to passing their businesses on to their children.
Apart from a sale, there may be other ways that your business can be a source of income. For example, you might continue to own dividend-paying preferred shares that could provide you with some income (based on the business's earnings) after you retire.
No matter what your plans, an effective succession plan is essential, to help ensure that you can reach your retirement objectives. (See How to get started on succession planning.)
Registered plans
While the equity in your business can be an important source of retirement income, it's a good idea to diversify your income sources. For business owners and non-business owners alike, an RRSP is an essential retirement planning tool. You may enjoy ongoing personal tax deductions for your contributions, and your earnings will accumulate tax-deferred as long as they are in the plan. (See Entrepreneurs prepare with RRSP savings.)
Non-registered investments
In addition to building your RRSP, you can establish a personal investment portfolio that complements your business.
For example, an entrepreneur with a stable, well-established business might be quite comfortable with a significant weighting of growth-oriented equities. A new business owner, on the other hand, might want to offset the risk associated with starting a business by emphasizing secure, fixed-income investments.
Staying on track
It's important that you create a written document to record your retirement plan, to help keep you on track, and to facilitate regular reviews with your accountant, lawyer, and CIBC business advisor. Changes in your business or in your personal life may require adjustments, as may changes to tax laws.
Your CIBC business advisor and our team of CIBC Investment Specialists are in an ideal position to help you see the "big picture" and take a holistic approach to retirement planning.
Trademarks and Disclaimers
The information in this article is believed to be accurate at the time of publishing; CIBC is not liable for any errors or omissions. This article is intended to provide general information and should not be construed as specific legal or tax advice. Individual circumstances and current events are critical to sound planning; anyone wishing to act on this article is best instructed to consult his/her CIBC business advisor.
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