Why is it important to expect the unexpected?
Contingency planning is a crucial skill in business. Many owners take pride in being hands-on, but doing so can leave the business vulnerable. If something suddenly happens, such as illness, disability, or unexpected death of a partner, your operations can be disrupted, and the value of your business can be reduced. Without proper planning, retirement can have a similar effect. If you choose – or need to – step away, who will take your place? Will the ownership structure need to change?
Start by reviewing your shareholder agreement and employment contracts to make sure they reflect your current situation. Anticipating potential problems can help your business respond smoothly when crises do happen, while long-term planning will ensure a stable transition when you’re ready to exit.
→ Read this article on the importance of estate planning from personal and financial points of view
Another important tool: insurance. It can protect your family and business from financial shocks. Go over your policies regularly to make sure your coverage and beneficiaries are still appropriate.
How much will it cost to live while retired?
The amount you’ll need to retire comfortably will depend on a series of factors that can vary from person to person. It’s always best to consult with an advisor when trying to determine how much money is enough for the future. However, there are certain things you can start thinking about early on to facilitate planning:
- When did you start saving? The earlier you began, the larger your nest egg will be.
- At what age do you plan to retire? If you’re thinking of leaving your business at 60 years old rather than at 65 or more, you’ll need to make sure your retirement income can sustain you and your loved ones.
- How do you plan to spend your retirement? Are you looking to downsize? Travel the world? Do you have healthcare considerations? The type and scale of your plans will play into the amount you need to put away prior to exiting your business.
- Where will your money be coming from? Do you have a pension? What kind of assets do you have? What kind of return on your investments are you forecasting?
- What are your hopes in terms of legacy? If you want to leave something to loved ones or make sizeable charitable donations, plans need to be put in place to make that happen.
→ Explore this article to find out how retirement planning can be different for women
Where will your retirement income come from?
Ensuring that you can retire comfortably after selling or exiting your company is key to your peace of mind. Often, business owners are so focused on running their company that they don’t plan for retirement. Some simply hope the sale of the business will be enough – but hope isn’t a strategy. Market conditions and changes in your industry are just two of the circumstances that can affect the value of your business.
In Canada, you’ll have access to the Canada Pension Plan/Québec Pension Plan and Old Age Security. But there are other ways to build a more secure retirement while you’re still operating your business, including the purchase of real estate, stocks and bonds, and more. Another option is an Individual Pension Plan (IPP), which allows your company to contribute to a tax-deferred retirement account while receiving a tax deduction. Depending on your age and exit timeline, an IPP – combined with other savings and investment tools – can be part of a diversified, tax-efficient retirement strategy to better manage financial risks.
Which financial and tax planning strategies are most effective?
Selling all or part of your business – commonly called a liquidity event – can result in a large cash payout. But it can also trigger significant tax consequences. That’s why early planning is key. One helpful approach is known as 3D tax planning. This involves:
- Deductions: Maximize allowable personal tax deductions.
- Deferrals: Use tax-deferral tools like RRSPs or IPPs.
- Divisions: Consider income splitting opportunities with family members involved in the business.
Good to know: Income splitting is a tax-efficient strategy that can also help you make the most of your retirement income. Read all about pension income splitting here.
As you prepare for an exit, a forward-looking corporate tax strategy becomes essential. Tools such as the lifetime capital gains exemption, estate freezes and reducing non-performing assets are useful, but they can take years to implement. Starting early gives you more flexibility and better outcomes. It’s also important to remember that tax laws and regulations change, so make sure to review your plan every few years to make necessary updates.
What’s next?
Selling your business can feel like a dream come true, but it can also bring uncertainty. Many owners worry about losing their sense of purpose or identity. That fear can delay exit planning or even the exit itself, and it can lead to unnecessary stress once you’re retired. That’s why life planning is just as important as financial planning. Ask yourself:
- How do you want to spend your time in retirement?
- Are there passions or hobbies you’d like to pursue?
- Are there new professional paths you could explore?
Selling your business can be a stepping stone to something meaningful. Some former business owners go into teaching, public speaking or venture capital, while others get involved in community leadership or government. Make sure to talk to your family and advisors about your plans. When everyone is aligned, the transition to retirement is more likely to be both smooth and rewarding.
Whatever your needs, a financial advisor can help you map out a secure retirement when exiting your company.
To find out what’s best for your business and retirement planning, contact our specialists.