A while back, I wrote a blog titled Retirement Tips for Small Business Owners. One aspect of that blog revolved around business owners depending on their business to provide for their future retirement.
I discussed that any number of things could render your business obsolete and that small business owners need to have a back up plan.
Today, I want to share a back up plan with you.
Consider for a moment that it is a possibility that your business may not exist in the future. If that is true then there won’t be anything for you to sell. Although you could likely sell some of the fixed assets of the business, it probably won’t provide you with the money you need for retirement.
So how do you minimize the risk that your business may not be around? This is where Plan B comes into play.
A common strategy is to invest outside your business whereby you take a portion of the business profits (while there are profits) and invest them. There are essentially two ways that you could do this:
1. You can pay yourself more in the form of a salary / distribution and invest the extra into your own investment accounts. Or…..
2. You can set up a retirement plan such as a 401(k) at your company for you and your employees. I’ll cover this option in my next blog post.
Both of these options generally revolve around investing in the stock and bond markets, so let’s turn our focus there.
THE ELEPHANT IN THE ROOM
I know what you’re thinking because we’ve heard it many times before – small business owners trust their business more than they trust the stock market. As a result, business owners would rather invest their money in their own business. I certainly understand this, but doing so carries a lot of risk as well.
There is this perception that the stock market is similar to gambling in a casino. I agree that there is uncertainty with the stock market, but it is not the blind uncertainty that you see when playing roulette for example. Games such as this can cause you to lose everything in one spin, which is nothing like the stock market (if handled properly). The stock market operates in a much different way.
Let me try to provide a different frame of logic for you to consider. It’s very helpful for stock market investors to understand that they actually become part owner in a company when they buy a stock. However, it’s not the type of ownership they’re accustomed to; it’s more of a passive ownership role. And this is exactly what you want when you step into retirement.
With the casino analogy, you are not an owner; you are a donor. Have you ever seen the casino billboards that promise a 96% payout? This sounds good at first, but it’s not good for you at all. A 96% payout simply means that for every dollar you gamble over the long run, you will only receive back 96 cents. In other words, you are donating 4% of your hard earned money.
As a business owner myself, I believe that investing in the stock market carries less risk than putting all of your eggs in your own company basket. Sure I may be able to invest everything back into my business in the hopes that it will sell for an even higher premium in the future, but that is not a risk I am willing to take.
At the very least, having your money spread out between your business and personal investments helps to minimize the impact that any one singular event could cause you to experience financial ruin.
Furthermore, if a business owner diversifies away from their business into the stock market they would hopefully invest in more than one stock (company). Our clients, for example, are invested in thousands of stocks (and maybe even thousands of bonds to potentially lessen the risk further).
ONE FINAL PLEA
If all of that weren’t enough to convince you then here is one other major reason why you need to invest outside your company. If you ever decide to sell your business because you absolutely “need” the money and you don’t have any other investments to fall back on then you will likely be forced to take an offer out of desperation even though it may not be the offer you hoped for.
By having outside investments, you can wait for a better deal.
I understand that the stock market is risky, but so is placing all your profits into the walls of your own company. The best scenario is one in which you strike a balance between personal and business investment.
If you are a small business owner and are wondering whether or not you should be doing anything differently or what your Plan B should look like, then feel free to contact us or check out the Small Business Owner section on our website.
Or, if you have been contemplating adding a retirement plan to your company, then we can help you navigate through that process as well.
Stay tuned as next time I will be talking about whether or not you should implement a retirement plan (such as a 401k) at your company to fund your retirement. If you would like to be notified of this next blog post then feel free to sign up for our eContent.
P.S. We would love to hear any comments you may have so please feel free to leave them below. Also, please feel free to share this article by clicking on any of the social icons below.
Thanks for tuning in.
Brad E.S. Tinnon
CERTIFIED FINANCIAL PLANNER™
Photo courtesy of 401kcalculator.org