Retirement Planning for Small Business Owners

Retirement is one of the most ignored issues of discussion in Indian households. Retirement planning is not regular financial planning, and it's essential because it decides your lifestyle after you leave the job or business. Small-business owners require planning more than anyone because of uncertainty and lower odds of inherited funds.

Padmaja Choudhury   /   September 29, 2022
retirement-planning

First, let’s start with understanding the reasons behind retirement planning for small business owners. Then we will be exploring how to start with retirement planning.

Why

Owning a big business company allows one not to worry about retirement or the funds in old age, except in the worst-case scenario. Big business owners can expand, diversify, and build a legacy, yet keep up with their desired lifestyle.

Whereas small-business owners have to plan it for themself as there are high chances of

  1. Shutting their business- Forever-changing business technology always takes over small businesses’ market share. The next generation often avoids joining the business to explore better opportunities, resulting in the shutdown of the business. This makes business sustainability challenging and might eventually end up shutting the business.
  2. A decline in growth- Attracting the new consumer is costly, and retaining the existing consumer is even costlier. Also, the degree of growth declines for small-business owners in the long run. The digital world is also bringing new market competition and making small businesses run out of business.
  3. Lack of structure- Small-business owners lack a structure to sustain them for last. Small businesses don’t require many tools, systems, staff or documentation, which weakens the structure. Also, innovation in small businesses is not an area of focus that lower the chances of sustainability.

So it’s advisable to retirement planning for small business owners to live the life they desire to continue.

How

The first big step is to decide and give serious thought to retirement planning. All the processes, strategies, and tools come after the decision of retirement planning. Let’s explore the right approach to planning retirement before jumping to the tools needed.

  1. Sum up the need- Before planning retirement, know the fund you need for lifestyle expenses, to-do expenses, and all other financial commitments. Calculate all your needs and the existing saving, investment, and other liquid assets. Keeping the goal specific and measurable will help you to plan a better retirement.
  2. Succession Plan- Succession is practical for small business owners. Succession helps to keep the business in the long-term while taking early retirement. Knowing who would be operating the business in the future, who would be shareholders, and when the next generation will join the business. Speak to the lawyer and explore the better option available for succession planning.
  3. Onboard experts on the team- Strong investments and tax law expertise are necessary when setting up a retirement plan. Collaborating with the right experts can make practical plans for each step.
  • A financial advisor will help you to plan your retirement finances and calculate your assets and financial requirements.
  • Business Attorney ensures that the structure and execution of your business entity and any contracts are appropriate.
  1. Plan the Exit- Planning your exit is not destructive as you think. It’s a process of being ready for reality. Planning your exit in advance gives clarity, and plan accordingly. You must plan ahead to ensure that your company is prepared for potential buyers if your goal is to use the proceeds from the sale of your business to fund your retirement.
  2. Get enough time- For most small-business owners, retirement planning calls for a different mentality. Get time to be prepared for retirement, to let your investment give better returns to you. Plan your retirement within the practical timeline so you get enough time to process, strategies, and execute your plan. Time plays a crucial role in retirement. You don’t want to miss the fun of early age, and neither would you like to retire in a hospital bed.

Tools

Though retiring on the profits from the sale of your business is one way to fund your retirement. Diversifying your investment does not only help to optimize your returns but also helps to plan your expenses depending on the size. Open one or more retirement savings accounts as soon as possible to diversify your retirement planning.

Let’s explore the tool you explore during retirement planning.

  1. Senior Citizen Saving Scheme: You may prefer SCSS if you are a company owner over 60. An initiative supported by the government allows you to invest up to Rs. 15 lakhs and receive quarterly payments. You can choose this program if you have a bank or post office savings account.
  2. National Pension Scheme: NPS offers Active and Auto as its two primary investment options. Retirement is a long-term objective, so the NPS permits full withdrawal when you turn 60. While 40% of the corpus must be used to purchase annuities, providing a steady income stream in your post-retirement years, the remaining 60% of the corpus can be withdrawn as a lump sum.
  3. Pension Plan: You have this as an additional retirement planning choice. You must first invest a regular sum into a plan, and when you retire, you receive a fixed sum as a pension. A tax deduction is also available for pension plan investments under section 80C of the Income Tax Act of 1961.

Employed individuals get covered by their employers for their retirement, especially government employees. The self-employed person, business owners, and a few salaried people must do retirement planning themselves. While retirement planning is the individual’s strategy, there is a need to understand the needs and basics of retirement planning.

If you are a small business owner, you can consult a financial advisor to help you plan for retirement.


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