Retirement planning for business owners
An Alberta-based sheet metal manufacturer who had operated two successful companies supplying oil patch industries for 27 years was sure he didn't need a Registered Retirement Savings Plan (RRSP).
"When I'm ready to retire, I'll just sell my business and live comfortably off the proceeds," he thought.
But when the Alberta economy suffered a downturn after the introduction of the National Energy Program, his market diminished. Four years later, he was bankrupt, without a pension plan or funds to re-establish himself.
He's not alone. Many others who have maintained steady, profitable businesses for years have been shocked to discover that where the market is depressed they can't sell their companies for enough money to retire on.
Poor markets and business failures are only two of the reasons why selling out isn't the best way to get retirement funds. The owner of a moving company who had a severe heart attack and was incapacitated for eight months is another. He had been the driving force in his company. The manager left in charge simply didn’t have the owner's expertise, and made several bad decisions. As a result, the firm was forced into bankruptcy. When the owner eventually died, his estate was only a small portion of what it had been.
To avoid such pitfalls, you need to begin planning as early as possible for retirement.
Think of it as a form of life insurance. You’re obviously not planning on a business failure, but if it does happen, you want to have the finances to carry on comfortably during your retirement. Owner/managers should establish retirement plans while still in their 30's, if possible, using the services of an accountant, a lawyer and a financial security advisor.
Here are the basic measures you’ll want to consider.
1. Registered savings fund
The first step should be to set up a retirement savings fund; either a company-registered pension plan or an RRSP.
2. Insurance
Next, buy sufficient life and disability insurance. The chances of suffering from a lengthy illness are greater than of dying prematurely. There should also be enough disability coverage to meet your current annual living expenses.
You’ll also need adequate business-interruption insurance to cover loss of profits if the business ever closes, as well as coverage for lost profits while rebuilding sales volume after the return to work.
3. Non-registered savings
You might also consider non-registered investments designed to supplement retirement income. They may be established inside or outside the business. If the corporation does participate in the funding of the plan, then you’ll have to consider the impact of the rules pertaining to Retirement Compensation Arrangements.
If you’re a business owner, ask about planning for your retirement now.
J. Paul Wilson, CFP, CLU, CH.F.C., TEP
2-33 Thorne Avenue, Dartmouth, Nova Scotia, B3B 2E7
Halifax/Dartmouth (902) 429-2696 ext. 225 Toll Free 1-877-429-2696 ext.225
Web site: www.jpw.ca Email: paul@maritimewealth.com
The information contained in this article is intended to provide general guidelines only. The application and impact of the law can vary widely from case to case based on the specific or unique facts involved. Accordingly, the information in this article is not intended to serve as legal, accounting or tax advice. Users are encouraged to consult with their professional advisers for advice concerning specific matters before making a decision.
Original article prepared and copyright held by London Life Insurance Company. Reprinted with permission.
