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 Plans
- non-registered investments
Equity in your business
Many entrepreneurs assume that their business will fund a substantial portion of their retirement.
One strategy is to sell the business. Special tax implications that 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 Canadian qualified small business corporation, you may be eligible for a $800,000 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.
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 business transition plan is essential, to help ensure that you can reach your retirement objectives. (See How to get started on business transition planning.)
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, a Registered Retirement Savings Plan (RRSP) is an essential retirement planning tool. You may enjoy 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.)
Tax-Free Savings Accounts (TFSAs) became available to Canadians beginning in 2009. TFSAs can also play an important role in retirement savings accumulation in that investment income earned inside a TFSA is never taxed.
In addition to building your RRSP or TFSA, 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 specialists are in an ideal position to help you see the "big picture" and take a holistic approach to retirement planning.