Return to site

How Business Owners Can Diversify Risks when Planning for Retirement

- Ivan Ong

September 12, 2021

Your Business is Your Retirement Plan

For many business owners, their retirement dreams would be based on what the business can provide. Typically, the plan would be to grow their businesses and groom it to be a cash cow that generates income yearly, via dividends, director’s fees, or the like.

This Plan A would work in an ideal situation, and it could jolly well happen. Nonetheless, the wise and prudent business owner knows the risk of sitting on a one-legged chair. Markets are volatile, and businesses are subject to business cycles. Your business can do well when you are the captain of the ship. How certain are you that this ship can continue to do well when you take your hands off the steering wheel?

You Plan to Fund Your Retirement by Selling the Business

Another route that business owners make is to sell their stake of the business to a successor at a good price, one that is enough to fund the rest of their retirement. Most of us have heard of the success stories of businesses that are being passed on to the next generation. The founder works hard to build up the business, then sells the shares and lives comfortably for the rest of their golden years.

Relatively speaking, selling your business is easier compared to starting a new business. But as the saying goes, the devil is in the details. The seller would always want to sell it at a premium, the buyer would always want to get it at a discount. Determining the fair market value of your business is an art form subjected to the wide range of opinions of the buyer and seller. It can be a real challenge to plan your retirement around such a big unknown. The wise and prudent business owner knows that.

You Don’t See Yourself Retiring From Your Business

Some business owners have shed blood and sweat to build their business, but every drop of it is worth it because they are doing it for something that they love and own. You can’t imagine doing anything else that’s different from your business. As tiring as it may be, you don’t mind spending the rest of your life doing what you love. Retirement doesn’t exist in your dictionary.

Yet, life is life. Every one of us will stop working one day, either by choice or by the circumstances around us. Physical and mental conditions deteriorate, and our bodies might even require regular servicing and replacement with some spare parts. Retirement is not just a possibility; Retirement is an eventuality.

Challenges of Retirement Planning for Business Owners and Entrepreneurs

Lack of Consistent Profits to Accumulate Retirement Savings

Coming up with a strategy can be difficult when the conditions are variable and always changing. Income uncertainty could be an issue that makes retirement planning more challenging for business owners and entrepreneurs. One simple solution is to give yourself a fixed salary like the rest of your employees. However, many small business owners can attest to the fact that they are the first ones to take a pay cut when there is a cash flow crunch. Uncertain cash flow makes retirement planning harder.

Invested Previous Profits Back Into the Business

You run your business, and you know your numbers. It makes mathematical sense to plow the profits back into your business because the return on investment for your business can beat any capital market instruments out there. From that perspective, it takes mental effort to convince yourself to consider alternative viewpoints.

There might also be times when your business requires additional capital to be pumped in. The options typically are external equity financing, external debt financing, or having shareholders pump in more capital. The 3rd option could mean redirecting your retirement funds to the business.

There’s No Business if There’s No You.

This challenge is rather tricky to solve. You are the face of the business, or the business might even be named after you as well. Succession planning needs to be carefully thought through. It might mean that the day you retire is also the day the business retires. Solutions can include rebranding, or changing the corporate structures. The best time to minimize the impact would be to make changes as early as possible.

3 Other Retirement Income Streams for Business Owners and Entrepreneurs to Consider

The wise and prudent business owner knows that a 4-legged chair is much more stable than a one-legged stool. Besides having a retirement that is funded by your business, every business owner should consider these 3 weapons in their arsenal.

  1. CPF LIFE
  2. Private Annuities bundled with Tax-Deferment / Retirement solutions like SRS. Deduction (Business Expenses) + Relief (Personal Income)
  3. Dividends or Divestments from an investment portfolio diversified globally, across industry sectors and asset classes
  4. The 3 streams listed above are simple to understand. However, the implementation of these solutions requires thoughtful analysis and understanding of the business owner’s financial situation. It involves a much deeper conversation than what can be written in an article like this.

Final Thoughts

Business is about taking calculated risks, while Risk Management is a key component of retirement planning. You need to continue to build and strengthen your business, yet at the same time, you would want to diversify away from your own business to reduce your concentration risks. Balancing these 2 seemingly contradicting aspects is the key to a happy retirement.

It is a difficult task requiring 2 different perspectives. As such, there is a true value in engaging a representative from a trusted Independent Financial Adviser who can cover your blind spots and provide a more balanced viewpoint.

About The Authors

Ivan Ong is a consultant representing Financial Alliance Pte Ltd. He specializes in family wealth planning for business owners and the self-employed. 

Special thanks go to Chew Hock Beng for his valuable insights and comments. 

Alternatively, to find out more, attend our "The Last 7000 Days" webinar.