By the time entrepreneurs have processed all their facts and figures and responsibilities, they are often tempted to postpone any personal investments, preferring instead to depend on their business equity to finance their retirement. This isn’t always the best course of action.
A recent TD Canada Trust poll indicated that most small business owners in Canada planning to sell their businesses (66%) hope to use those funds to finance at least part of their retirement. Another 14% of those polled plan to fund their complete retirement from proceeds of the sale.
I would strongly caution entrepreneurs against relying on the equity of their businesses as the sole source of financing their retirement. It is simply too risky. Even though your business equity may provide a considerable source of income for your retirement, you should still make set contributions in order to build on your financial portfolio. This would not only help protect your investments but also work towards maximizing your retirement income. As an entrepreneur, you must try and balance your more risky business investment strategies with your personal investments with an effective asset allocation model.
Here are some tips for growing your small business while also planning for your retirement:
Look at a Tax-Free Savings Account (TFSA): If you are an entrepreneur and have surplus personal cash, consider the benefits of a TFSA. It allows you to earn tax-free investment income. The TSFA complements existing registered savings plans like the Registered Retirement Savings Plans (RRSP) and the Registered Education Savings Plans (RESP).
Open an RRSP: RRSPs, which offer tax deferral and compound growth, are probably the most popular means for savings and investments among entrepreneurs today, especially if you don’t have a guaranteed pension. Most small business owners pinpoint cash flow as the single-most obstacle to their success and it’s never easy to find a sizeable amount of cash to contribute to an RRSP every year. Your best bet is to begin with small amounts but be sure to establish a pre-authorized transmission of funds that will transfer automatically a pre-established amount into your RRSP on a regular basis.
Issue dividends to fund your RRSP: Since dividends are most often paid at lower tax rates, they differ from any regular salary, commissions or bonuses you earn, which allows you to contribute more to your RRSP at year-end. So, if you receive a tax refund resulting from your RRSP contribution you can simply channel it back into your investments.
Income-splitting can boost retirement savings for your family: You should look at income-splitting strategies for investment purposes. One example would be to hire your spouse and then split the employment income with your spouse. This approach would allow an income shift to a family member in a lower tax bracket, thus reducing your total tax bill. Another strategy would be to have the spouse with the higher taxable income make a spousal contribution to their RRSP. This allows for a current deduction for the higher income earner today and allows for income splitting in the future.
Be sure to get expert advice: For many reasons, entrepreneurs often have trouble outsourcing business, but they manage to get around this obstacle by surrounding themselves with the cream of the crop—experts who can help navigate them through stormy waters of running a small business. You also need financial advice to help steer you through the many rules, regulations but also beneficial strategies.