Business owners are often torn by the decision to either invest more into their business or to invest in their retirement.
Because most entrepreneurs put a lot of time, sweat and tears into growing their businesses, when faced with the decision between the two, most choose to invest more money into their businesses. This lack of diversification is risky, and while it can pay off later, it’s not a reliable way to plan for retirement.
Many business owners approach investing differently than non-business owners. They often go by gut feel and take more risks than non-business owners by reinvesting their profits into their business in the hopes of further wealth accumulation.
Hope is not a plan.
There are ways of striking a happy medium where business owners not only are able to invest in their business, but also can plan effectively for their retirement in way where they’re creating cash flow, diversification and maximum tax advantages.
Here are five ways small business owners can balance the demands of growing their business while investing in retirement:
1. Don’t rely on your business as the goose that lays the golden egg. There is no doubt that your business will make you the best returns, but it shouldn’t be your only asset. Don’t put your eggs all in one basket, especially if they’re golden.
2. Diversify, spread out your risk, and don’t be put off by a lesser rate of return. Diversifying your risk away from your business might mean anticipating a lower rate of return, but that is the point: lower risk usually means a more conservative return.
3. Ensure the investments outside your business aren’t correlated to your industry. A wood furniture builder should not be investing everything in lumber. The goal is to diversify risk, which means that concentrating on assets that are linked to the cyclical nature of your business won’t help.
4. Make saving a habit. Business owners are busy and driven individuals with little time to focus on their financial plan. The simplest way to make saving a habit is to arrange automatic monthly payments of either a set dollar amount or perhaps a percentage into a well-diversified, cash-flowing investment portfolio.
5. Begin with the end in mind. Succession planning is a crucial part of any business owner’s strategic plan, both in business and personally. Understand your end game. When do you want to sell? Do you have the right structure in place now to make it tax-efficient later? Do you still want to participate in the company after you’ve retired?
When business owners do commit to plan for their retirement, they are actually more conservative when it comes to saving and spending. They allocate more time to shop for financial products and manage their financial affairs than non-business owners. Essentially, they want to play an active role as the CEOs of their own wealth. •
