Retirement planning tips for business owners

“Retirement.” Just the sound of the word is enough to send chills up many entrepreneurs’ spines. The idea of giving up control of a business you’ve nurtured and grown might seem inconceivable. But health, family obligations and changing priorities can raise questions about what you want your retirement to look like. Do you want to stay involved in the company? Pass the baton to the next generation or someone you’ve groomed to take over? Or would you prefer to sell or close the business?

This is a very personal decision, and there’s no wrong answer. “No one can tell you what’s best for you,” says Judith Anderson, Senior Vice President and Senior Workplace Benefits Product Manager at Bank of America.

Option 1: Staying connected

Remaining involved in your business in a more limited capacity will allow you to continue harvesting income from it and stay connected with colleagues — minus the pressure of running the show. Many entrepreneurs find it rewarding to shift away from day-to-day responsibilities, instead providing higher-level oversight, coming in as an occasional troubleshooter or consultant for the business. “Just eight to 10 hours a week might be enough to keep you engaged,” Anderson says.

There’s a drawback to this arrangement, however — you’re no longer the boss, and you may not have the final say in decisions. Additionally, the financial rewards of selling the business will be postponed. And your ongoing commitments may limit your freedom to travel or enjoy other activities whenever and for as long as you want.

Option 2: Passing the baton

Many entrepreneurs hope to transfer their business to a family member when they retire as a means of creating a legacy for future generations. If this is your goal, it’s essential to discuss it with potential successors early on to ensure they are fully on board with your vision—and the demands keeping it alive will require.

Transferring ownership of a business to a family member as a giſt is also an option. However, this could have several financial consequences: You may no longer receive income from the business; you won’t reap the financial rewards of selling it; and you may have to pay a giſt tax, depending on the value of the business. Additionally, there could be tax repercussions for your successor. Consult with financial and tax advisors for guidance, and with an attorney to ensure your wishes are reflected in your will.

Option 3: Selling the business

If you opt to sell your business, start planning well in advance. You'll need to get your financials in order and should take important steps beforehand, such as asking key employees to sign agreements and to stay on aſter the sale. Such actions may give potential buyers some confidence that the business will continue to perform successfully without you.

Keep in mind that not all businesses are salable. And economic factors that are out of your control, such as a recession or significant market shiſts, may affect the valuation of your business. In addition, even if you prefer to receive the proceeds in one lump sum, you might find that your buyer will need to make payments over time, which could have implications for your plans in retirement.

Considerations when stepping away

Your finances today

Review your assets with your financial advisor to help determine if it’s the right time to retire. Be sure to include any real or anticipated proceeds from selling your business, as well as retirement savings, investments and income from Social Security payments. In some cases, building up your savings and delaying Social Security payments for a few more years can help strengthen your financial foundation in retirement.

Your ongoing financial obligations

Review your budget to make sure you can cover your monthly expenses with some combination of savings, Social Security, retirement and investment accounts. If necessary, downsizing to less expensive housing and reducing other costs may also make it possible to retire when and how you wish.

Knowing how you want to spend your time

Not all considerations are financial. Knowing what you want to do in the next phase of your life—whether that’s traveling, volunteering, visiting grandchildren or enjoying hobbies—will help you determine whether staying on or letting go is the best option for you.

There’s no definitive “right way” to transition out of full-time entrepreneurship. But with careful financial planning and a thoughtful eye to the future, you can help ensure you enter your next chapter on your own terms.