Business Owners! Master Your Finances: The Ultimate Guide to Retirement for YOU!

You’ve put in a lot of effort to create your business! You’re proud of what you’ve achieved. Eventually, there will come a time to step back from it. Here’s how you can begin preparing for that moment.

If you’re a business owner, retirement might not be at the forefront of your mind. Your focus is likely on running your business, managing your team, and keeping things afloat. However, the day will eventually come when you’ll be ready to step back.

Currently, the idea of stepping away might seem unimaginable. You’ve invested a lot of yourself into your business, so delaying thoughts of retirement might feel more comfortable. But beginning to plan now could make the transition from working years to retirement smoother.

Take Emily Rivers, aged 59, for example. She runs a successful dance costume business and sees retirement as an open-ended concept. She loves her work and plans to mentor others to eventually take over parts of her role. This way, she can focus on what she enjoys most while staying as active as she wants, leaving room for semi-retirement activities.

Then there’s Oliver Clarke, a 60-year-old software company owner with a clear retirement strategy. He dreams of retiring to spend time writing and traveling with his partner, Lily. He aims to retire in around four or five years while he’s still capable of pursuing those interests.

Clarke’s plan involves selling the company or his shares when he’s ready to retire, confident in the solid leadership team he’s built to handle the transition.

Regardless of when you plan to retire, there are numerous operational, legal, and tax considerations. Let’s begin by looking at your retirement income: how much you’ll need and where it will come from.

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Estimating the expenses for your retirement living: What will it cost?

This question concerns your monthly or annual cash flow, a figure that’s unique to you. It doesn’t need to be complex. Start by creating a budget. Review your current personal expenses and estimate what your retirement expenses might look like. Some costs like food, housing, and utilities might remain stable. Others such as transportation, clothing, and retirement savings might decrease. Meanwhile, expenses like travel and hobbies could increase. Your retirement budget will rely on the kind of lifestyle you anticipate during retirement.

Your calculations won’t differ much from someone who doesn’t own a business. However, it’s crucial to consider inflation and its potential impact on your retirement. If you want to have this done quicker and easier, consider working with an investment advisor, portfolio manager.

What sources will provide your income during retirement?

The question focuses on the various sources of retirement income. Once you tally these sources, how near will you be to your income target? And what additional savings will you require to bridge the gap? For business owners, this scenario can appear distinct.

Here are seven potential sources of retirement income applicable to individuals like you:

Selling the Business:

Begin by questioning yourself: “Is it feasible to sell my business?” Following that, consider, “For what value?” And lastly, inquire, “To whom?”

If your business heavily relies on your individual expertise, such as in consulting or freelance work, it may likely cease when you retire. Nevertheless, your business might possess valuable assets like equipment, inventory, intellectual property, a client base, or goodwill, making it a viable candidate for a sale. Potential buyers could include existing business partners, family members, or unrelated third parties. Before selling, it’s crucial to assess the business’s assets to determine its worth. Consulting a tax advisor about the Lifetime Capital Gains Exemption (LCGE) is also wise. The LCGE can help maximize your earnings upon sale. For further information on LCGE, refer to the Canadian Federation of Independent Business (CFIB).

Canada Pension Plan (CPP)/Quebec Pension Plan (QPP)

CPP/QPP retirement pension serves as a taxable monthly benefit that substitutes a portion of your income during retirement. To ascertain the potential benefit, check your My Service Canada Account for CPP or My Retraite Quebec Account for QPP. The amount you receive hinges on the contributions made throughout your working life. As a business owner, you’re required to have made both employer and employee contributions to be eligible for CPP benefits.

Old Age Security (OAS)

The Old Age Security (OAS) pension offers a monthly payment for individuals aged 65 and older. The payment amount is contingent upon the duration of your residency in Canada or certain specific countries after turning 18. Unlike CPP, OAS does not mandate contributions from you. Consequently, as a business owner, OAS is likely to form the cornerstone of your retirement income. However, it’s essential to be aware that if your income exceeds a certain threshold, the government may initiate a “claw back,” reducing or entirely rescinding your OAS payment.

Tax-Free Savings Account (TFSA)

Often overlooked for retirement savings, a tax-free savings account is commonly utilized for emergency funds, major expenses, or leisurely pursuits, even among business owners. While these are worthwhile uses, the combined effect of contributions and investment growth can lead to substantial savings within a TFSA. (If you haven’t previously had a TFSA and turned 18 before 2009, the maximum contribution limit, as of January 1, 2023, is $88,000.) Consequently, TFSAs can serve as a robust tool for amassing a tax-efficient income source for retirement.

Dividend Distributions

Dividends from your corporation can also serve as a retirement income source. If, post-retirement, you retain some ownership of your Canadian corporation, the dividends from those shares can contribute to your income. Consult your advisor to determine if your business meets the criteria.

Individual Pension Plan (IPP)

An IPP is a personal pension savings plan, distinct from larger group plans, but you will require RRSP investments personally to be able to set up your IPP. NOTE: Setting up an IPP requires your business to be incorporated.

Here’s how it works:

A corporation sponsors the IPP, creating a formal pension plan, which must adhere to regulatory standards and is administered by a pension plan administrator.

Contributions to the IPP are made by the employer (the corporation) and are actuarially determined. The amount contributed to an IPP is usually higher than what could be contributed to an RRSP due to the defined benefit nature of the plan.

Contributions made by the employer to the IPP are considered a business expense and are tax-deductible. This feature allows business owners to redirect company profits into their retirement plans while minimizing corporate taxes.

At retirement, the IPP provides the plan member with a predetermined, defined benefit based on factors such as salary, years of service, and the plan’s provisions. The plan offers regular payments in retirement to the member, ensuring a steady income stream.

Build up your RRSP savings over time and then when it makes sense to do so, your RRSP combined with an amount from your corporation (which becomes a tax deductible expense to the corporation) come together to fund your IPP.

An IPP offers an efficient means to draw money from your business’s profits or savings. Similar to a pension, you can split IPP income with your spouse or partner. Just like an RRSP, your IPP assets are protected from creditors. Your advisor can guide you through the setup process.

It’s important to consult with an investment advisor or pension specialist to determine if an IPP is suitable for your specific circumstances, as these plans can be complex and are subject to specific rules and regulations.

The significance of preparing for unforeseen circumstances

One of the most effective ways to safeguard savings is through health insurance, encompassing critical illness coverage, personal health and dental plans, and long-term care insurance.

Preparing for unforeseen circumstances, through savings and insurance, constitutes a part of retirement planning. Financial planning plays a key role in achieving life goals. It assists in assessing your current standing, identifying future paths, and determining the best route to reach those goals.

Have Questions? Contact us

We’ve assisted our clients through every stage of life. Even when you’re not aware that something might impact your financial future, it likely will to some extent. Engaging in a conversation with your investment advisor about any financial changes is an excellent approach to keeping your financial goals in focus.

If you’re in the process of planning a cross-border move or have already relocated from the US to Canada and seek assistance in streamlining and enhancing your financial strategies, we’re here to help. We have the expertise in cross-border wealth management. Don’t hesitate to reach out to us — we’re committed to providing tailored solutions for your cross-border financial needs.

For more information or to connect with me, you can reach out via email at [email protected] or get to know me better by exploring my engaging video content on YouTube https://www.youtube.com/@joemacek.

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Don’t hesitate to reach out today at 1–888–324–4259 to discover more about how we can help you achieve your investment milestones.

Joe A. Macek, FMA, CIM, DMS, FCSI

Investment Advisor, Portfolio Manager

iA Private Wealth | iA Private Wealth USA

Toll Free North America: 1–888–324–4259

Email: [email protected]

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