It’s dangerous to own a small business. Financially dangerous, that is. If all the Americans who own small businesses were aiming for total financial security and a way to avoid too much responsibility, they would have chosen a different career path. But the rewards of building something from the ground up, totally owning it, and being your own boss more than make up for the risks.
Unfortunately, the reality is that you can’t retire with only personal fulfillment in the bank. Many small business owners don’t have any money set away for retirement, hoping instead that the business they own will pay for their life after they leave the workforce.
Most small business owners plan to sell the business and put that money in the bank. Others have a family business that they hope will be continued by the next generation, with some sort of dividends paid to them for their cost of living after work.
These straightforward plans might not survive first contact with the enemy, however. As any small business owner knows, setbacks can come out of nowhere. For example, many small business owners report that they would postpone their retirement if their business was not valuable enough to sell, or if the economy was bad. But what happens if you develop health issues a few years before you planned to retire? Millions of retirees leave the workforce earlier than they had planned to, not by choice, but because of poor health. Even if the health complications don’t yield significant medical bills, they might make it impossible for you to continue to operate your business. At that point, delaying retirement is no longer an option.
Additionally, do you know how much you could truly sell your business for when you retire? Many business owners actually undervalue themselves when putting a valuation on their business. If, over the years, you don’t commit a lot of time and energy to training others in how to run your business, the organization may not be able to exist without you. This concentration of knowledge and responsibility are understandable for a small business. But if that’s the case with your business, then the business sans you is really only worth the value of the property and equipment you could sell off.
As any financial advisor would tell you, having all your eggs in one basket is not a good way to invest in your future. Your business, no matter how much you love it and dedicate yourself to it, is one basket. Having a 401(k) type retirement plan, even if you only invest small amounts in it over time, can ensure that you don’t lose everything you’ve put away for life after work if your small business is unable to pay for your retirement.
