Can your company also be your retirement cash cow?
Only if you milk the most from it, and that largely depends on how and when you liquidate your investment of time, effort and resources.
More baby boomers than ever are creating companies as a final career stage. According to the Kauffman Index of Entrepreneurial Activity, 23.4 percent of all entrepreneurs were ages 55 to 64 in 2012 (compared to 14.3 percent in 1996). Most entrepreneurs focus on building their companies. Converting those companies into retirement income is a completely different process. The earlier you start to think through the implications of company structure, cash flow and momentum, the better your chances of capturing the greatest return. Here's a big-picture countdown of the most important milestones on your route from business owner to retiree.
10 years before retiring: Review succession options. Is there a family member or employee who is enthusiastic, qualified and willing to fill your shoes? If you start sharing management responsibilities now, you can coach your successor through several industry growth cycles. "You want to know that the successor is capable of running the business, because your income is dependent on that person's abilities,"says David Scott, vice president advanced sales at Penn Mutual Life Insurance Co.,which specializes in retirement planning and related insurance topics.
A common plan, Scott says, is for the successor to start buying out the founder's share upon the founder's retirement, paying the founder his or her current salary for a set period of time. That ensures income for the founder – assuming the company continues to grow.
Nine years before retiring: Can you claim some additional bonuses and income to boost your retirement investments? Mary Ellen Baldwin, a certified financial planner based in Melbourne, Fla., notes that there are several catch-up options available to those over age 50 who are trying to sock away as much as possible for looming retirement. Consider doing so while you still have maximum control over your income.
Eight years before retiring: Review the legal underpinnings of the company to ensure a seamless transfer of ownership, via stock, partnership or other structure.
Seven years before retiring: Still looking for a good candidate to take over? Don't overlook wannabe entrepreneurs in their 20s, says Dane Stangler, director of research and policy for the Kauffman Foundation. Right now, a promising candidate might have more enthusiasm and energy than financial resources, but that could change if you groom her to take over.
Six years before retiring: Meet with your tax advisor to review your assumptions about cash flow and tax shelters. If the company's tax structure has been set up mainly to benefit you personally, now is the time to make changes with the company's best interests in mind.
Five years before retiring: You have a date in mind, but what if economic conditions change? Be prepared to accelerate the transition timetable if the company is going through a growth spurt, or take more time to right the company if it has hit a rough patch. "The principal value of your business is to sell it as a going concern, not to liquidate the assets," Scott says. Be open to selling earlier in a peak cycle at maximum value. Track the selling prices in your industry for operations like yours, Baldwin says, so you know a ripe selling moment when you see one.
Four years before retiring: Integrate your successor into key business relationships, especially if those relationships are highly cyclical. Your goal is for your successor to become a trusted business partner with suppliers, lenders, vendors and collaborators.
Three years before retiring: Review your financial transition plan with your financial advisor and tax accountant – together. Small shifts in timing can garner big financial wins. As you enter the home stretch, mark out the milestones for making key transitions and transactions at the best time.