Canadian business owners walk a different road to retirement. With no employer-sponsored pension plan, they need to take special care of their wealth strategy. And when the business becomes the nest egg, their business transition defines the years leading to retirement — and the eventual health of their estate.
The lifestyles of business owners vary based on industry. Many professionals own their practice and deliver services to their clients or patients but don't always see themselves as entrepreneurs. What business owners all share: the need to count on themselves to enhance their financial future.
Wealth strategy — for business and life
To help pave the financial road to a secure retirement, business owners should consider these seven tips:
1. Know the value of your business
The enterprise forms a key part of the retirement discussion, so leaving its value to chance is not an option. To begin the process, business owners first need to know much money the business would net on the open market. Valuations professionals consider a wide range of information about the business to arrive at the company's value. Once the value is established, valuators can work with the business owner to increase the potential sale value, and suggest ways to enhance the value of the business in the eye of a buyer.
2. Calculate your retirement budget
Like many Canadians, business owners often do not know how much they spend personally on a monthly basis. Others may possess a general idea of their expenses but lack the full picture — perhaps forgetting costs paid once per year. Still others may be able to list their costs but assume these will decrease in retirement. In reality, most costs are not tied specifically to work life — leisure costs could in fact spike after Canadians bid farewell to the office.
3. The insurance difference
Life insurance can be important for all Canadians, but it offers further options for a business owner's estate plan. Take, for example, a business owner with three children. The owner plans to gift the business to the oldest child, who has gradually assumed a leadership role in the business. To equalize the inheritance of the two younger children, the owner can buy a life insurance policy to provide the necessary liquidity.
4. Communicate your intentions
Discussions about wealth can test the tightest of family ties. Add a family business into the equation — and the sensitivities rise. Communication with family members is one way to manage relationships among family members. Key topics run the gamut: actions in case of sickness or sudden death, how to spend the business owner's savings during their lifetime, even the rationale behind major items in the will. To make the most of these discussions, embrace transparency. This strategy will help ensure not only the business owner's happiness during retirement but also the familial harmony of their loved ones for years to come.
5. Consider the CPP options
Business owners have the unique opportunity to control how much money they contribute to the Canada Pension Plan. They can do this by deciding whether to receive salary or dividends from the business — dividends do not trigger CPP contributions. As business owners near retirement, this CPP decision becomes more important: If a business owner has taken salary for 39 years, they should consider forgoing a salary in favour of receiving dividends. To receive a breakdown of lifetime CPP contributions, request your Statement of Contributions from the Canada Revenue Agency.
6. Prepare legal documents
Canadians need to ensure they draft three documents to manage their life and assets: a will, and two different power of attorney documents. As people age, they may become incapacitated and no longer be able to make critical decisions. Powers of attorney — one for property and one for personal care — help ensure their wishes are respected. Then, after death, the will continues to express the deceased's intentions. Dying intestate, or without a will, can be an expensive proposition.
7. Consider the tax piece
It is important not to overlook the significant role taxes play in calculating assets available during retirement and at death. The wealth plan needs to take into account how much is earned after tax, both during life and at death. The tax consequences of income from RRSPs, RRIFs, TFSAs, corporations, and other assets will play a significant role in a thorough wealth plan.
A plan — the first step in wealth management
Optimism is often the secret weapon of a successful business owner. It fuels their ambitions during the lean years and their grit as the business grows. From the tech founder aiming for an exit to the physician or lawyer opening a practice to the pharmacist purchasing a pharmacy — success requires belief that everything will work out.
To manage their wealth, business owners need to channel this optimism into a plan. The future is unpredictable – only by mapping its roads can business owners safeguard their assets.
Contact us to find out how BDO's Wealth Advisory team can help you manage your wealth strategy as you plan for retirement.