5 Retirement Strategies for Small Business Owners

You’ve worked tirelessly to build your business over decades––or maybe you’re just starting out, but beginning with retirement in mind.

Either way, the big “R” word––retirement––is on your mind and you want your golden years to be as golden as possible.

As entrepreneurs, you didn’t follow the traditional path of getting a job, working for 40 years, and retiring with a pension at 65. But thankfully, that gives you more choice about what comes next. However, when you’re self-employed, retirement has an additional complication: what to do with your business. 

In this mini-guide, we cover a few retirement strategies specifically tailored for self-employed small business owners. 

1. FIRE-ing yourself

Based on the FIRE (“Financial Independence, Retire Early”) movement, the concept of “FIRE-ing” yourself is to build investments outside of your business that pay you enough income to cover your lifestyle expenses. Previous iterations of this movement were known as “Financial Independence, Financial Freedom,” or “Building your own pension fund.” 

As a small business owner, the FIRE process is fairly simple: 

• Earn as much money as you can from your business while living as frugally as possible.
• Invest the difference (income minus living expenses) into stocks, bonds, real estate, businesses, and other income-producing assets. 
• Calculate your “FIRE number,” which is roughly your estimated annual expenses in retirement multiplied by 25.
• Once your income from investments surpasses your living expenses (i.e. reaches your FIRE number), you can live off investment income and retire from business.

The key element of FIRE is to increase income as much as possible while avoiding “lifestyle inflation,” so you can invest more as time goes on. It requires specific focus on cash maximization, which could mean sacrificing a lot in the short-term to win in the long-term.

2. From self-employed worker to asset owner

If you’ve built up a solid business with a few employees, you may want to think about hiring a manager to run day-to-day business while you maintain ownership of the business itself. In this model, you can use the business’ profits (after paying the manager) as your income in retirement. 

To make this model work, it’s not just about hiring a talented manager. You also have to remove yourself from the business over time with things like: 

• Standard operating procedures (SOPs) to get everything out of your head and onto paper.
• Training programs, so new employees can learn how to do the things you once handled.
• Institutional knowledge, so future managers and employees can know why you made a certain decision in a certain way.

Unfortunately, you have to build all of this while still running the business yourself (unless you have enough profit to hire a manager or consultant to build these processes for you). 

3. The slow burn

If you love your business and want to keep working (either from passion or sheer necessity on account of not having enough retirement savings), you can follow the slow burn method. 

The slow burn is when you shut down your business in phases versus the traditional “last day, then retirement” framework that’s common for employees. 

• Continue to work at full pace for as long as you want to, saving up money as you can to provide a cushion in retirement. 
• Over regular intervals (for example, one per year), reduce your business’ capacity so you don’t have to work as much. This might mean closing down an extra day per week, accepting fewer clients, or working fewer hours per day.
• Run your business this way as long as you’d like, eventually stopping completely when you want or need to.

If you want a slow burn, but don’t want to shut down the business, you can begin to hire employees to take on the tasks you no longer want to do. In this case, make sure to operationalize your business just like you would if you planned to hire a professional manager to take over the business.

4. A career of mini-retirements

Instead of working for 30-40 years consistently before retiring officially, use the mini-retirement strategy. For this strategy, you pick a set interval of time to work and time to take off, then plan your earning and savings around it. 

Here’s how it works: For example, let’s say every decade you want to work for nine years and take one year off, and you’re earning an average of $50,000 per year from your business after expenses.

• In years one through nine, only pay yourself $45,000 per year, saving up $5,000 in a corporate savings account. 
• In year nine, let your clients and customers know you’ll be taking the following year off from business. Plan to wrap up any projects before the year is over and talk to them about how you’ll re-start working together when your sabbatical is over.
• Come year 10, you can take the year off and pay yourself a full salary since you’ve saved an extra $5,000 per year for nine years to cover it. 

Note: This strategy comes with two caveats:

1. The annual savings towards your year 10 salary are in addition to any retirement savings goals you have. You save up enough money each year to pay yourself in year ten without any business revenue coming in, but that won’t get you through a longer retirement as you age. For example, if you’re saving $5,000 per year for nine years, so you have a salary during your tenth year, you still have to save additional money for a longer retirement when you’re older and want to stop working completely.
2. The assumption is you will work longer. Instead of working from age 25 to 65 and retiring completely, if you take a year off every decade, the assumption is you are willing to work until you are 69, since you’ve already experienced four years of “retirement” throughout your career.

5. Sell up

If you’re completely done with your business and want to cash out, you can sell it. A lot of different types of people want to buy businesses, including: 

• Local competitors who want to increase their market position. 
• New entrepreneurs who want to buy a ready-made business. 
• Employees of your business who want to build a business co-operative.

To make your business attractive to potential buyers, you should focus on maximizing the right kind of revenue and operationalizing the business so it can be run by any professional manager. 

The “right kind” of revenue is any revenue that’s predictable and more-or-less guaranteed, for example, recurring subscriptions or longer-term contracts. Operationalizing means ensuring no one has to ask you for specific help, but can instead look at SOP documents.

Retirement is what you make of it

As business owners, you get to define what retirement means to you, whether that’s working less, selling up, building investments, or something else entirely. The only thing that matters is ensuring you have the money to cover your desired lifestyle. Everything else is just details. 

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