Many small business owners demonstrate five important traits that often make them successful entrepreneurs but lower their chances of achieving their retirement goals:
Risk #1 – Reinvestment
Because their financial future is often directly related to the value of their company, many small business owners tend to reinvest all excess capital back into their business, rather than investing a portion of it in more diversified retirement portfolios or programs. This habit may increase short-term returns (if the business is successful), but it also increases short- and long-term risks.
Solution # 1 – Diversification
Many financial planners and investment professionals worry when a client has more than 10% of investable assets in a single investment. Understanding how to intelligently take profits out of your business and reallocate them to other investment choices could be the most important action you take to increase your chances of long-term success.
Risk #2 – Business Value = Retirement Income
Many business owners don’t know how much money they will need to retire comfortably. Because they often assume that most of their retirement assets will come from the sale of their business, their retirement income is often directly connected with the success or failure of selling their business. This creates large amounts of risk for the business owner.
Solution #2 – Planning
A exit strategy for the business should be in mind long before an ownership transition. Planning allows for target goals to be created. With a target, it’s much more obvious when course corrections are necessary along the way. Planning will also expose options and opportunities that may not have been considered to align your entire financial ecosystem (your financial resources, both personal and professional) with your goals.
Risk #3 – Poor Investment Management
When business owners invest for retirement, they often take too much risk. Because they are used to company-specific risk, they often disregard the fact that asset classes perform in unpredictable cycles, and they fail to sufficiently diversifying their holdings.
Solution #3 – Allocation
The best investment managers allocate assets across a wide variety of investment classes, work to manage their investment expenses and maintain ongoing strategic balance. They don’t try to market time or chase the next investment fad. Following these principles, along with making sure that you consistently invest toward your goals may dramatically improve the likelihood of meeting your goals.
Risk #4 – The Temptation of Success
After most small business owners retire, they often continue to take too much risk with their retirement plan investments because they think that their entrepreneurial skills have provided them with good training to be successful investors.
Solution #4 – Assistance
The skills that it takes to be a successful business owner are very different than those used for investing. Intelligent investment guidance can help business owners increase return expectations and lower risk by combining asset allocation wisdom with understanding of advanced opportunities.
Risk #5 – The Myth of Invincibility
Many small business owners are convinced that they will be healthy enough to continue to lead their business until they choose to leave. They also think that they will be able to leave on their own terms – when the value of the business is at its peak. More often than not, this is untrue as health issues – including disability and death – often force an owner to sell the business at a less than desired price.
Solution #5 – Protection
Two tools – a formal succession plan and insurance-funded agreements – can help reduce the risks that the value of your business will be damaged if you can no longer manage it. Creating a succession plan, with consistently updated agreements for the sale of the business, allows you to determine a fair sale price and simplify your transition away from the business. Insurance can be used to both fund the sale of the firm or to protect against illiquidity at death or disability.
Regardless of the exit strategy timeline and maturity of the business, owners should at the very least work with an experienced professional to:
- Complete an in-depth analysis of goals and plans for the future
- Provide a roadmap of preferred options to achieve goals
- Complete an analysis to identify whether or not assets and earnings power are protected and in position to grow without taking excessive risk
- Implement investment management strategies aligned with retirement income goals
Contact Brooks, Hughes & Jones Wealth Advisors for a no-obligation discussion about how to best address your business and personal planning opportunities.
~ BHJ Wealth Advisors — Gig Harbor, Washington — 253-534-8888