Retirement Planning For Business Owners

Business owners are particularly vulnerable to some misconceptions and false assumptions about their retirement. Let’s address a few of these issues.

Important Links

Website: http://www.yourplanningpros.com

Call: 844-707-7381

----more----

Transcript Of Today's Show:

Speaker 1: Welcome into another edition of Plan With the Tax Man with Tony Mauro, from Tax Doctor, Inc., and myself, as we talk investing, finance and retirement. And, this week retirement planning for business owners. Tony, you've been getting more and more questions about some things. Obviously it's tax season as well. But just in general, I think that sometimes there's an underutilized conversation point at least from a podcasting standpoint. So, let's spend a little bit of time this week talking about business owners and how to get ready for retirement, or even just kind of keep it in your mind. Because often as business owners, we tend to push some of those things off. And so, I think it'd be a good topic. But, how are you doing this week first of all?

 

Tony Mauro: Yeah, we're doing good. Right in the middle of the thrills of tax season so getting busy there.

 

Speaker 1: Wall-to-wall huh?

 

Tony Mauro: Yeah. It's starting definitely, but I mean, we've been doing it a while. We're fairly used to it. We have some new processes in place with this whole virtual stuff. But other than that, yeah, we're hanging in.

 

Speaker 1: Well, if you didn't check out our last podcast folks, we were talking about some tax tips. So on the prior one, you can go check that out and go to yourplanningpros.com, and you can check out our past podcasts and subscribe to the show if you'd like to as well. Usually a couple of useful nuggets here and there on each show that might benefit you. So, go check that out at yourplanningpros.com, or just subscribe at Plan With the Tax Man on whatever app you like to use, Apple, Google, Spotify. You can just type that into the search box of each app and find it that way, Plan With the Tax Man. All right. So, let's talk about some business stuff. Business plan in general, I think Tony, is there a misconception or just kind of that premise that, hey, if I execute my business plan to the best of my ability and that the retirement portion will kind of take care of itself.

 

Speaker 1: I think that's maybe easy to fall into that because we're pumping so much of our heart and soul into this thing, but often I think most business owners, I've done this myself as a small business owner a couple of times, is you forget to pay yourself or even your future self, because you're so worried about keeping the business. Especially for small businesses.

 

Tony Mauro: This topic, I mean, we could talk about for hours really. I love talking with my accounting clients because we service a lot of business owners, and do their monthly accounting. And, we also serve as their financial advisors. So, it kind of crosses over. But you're right. A lot of people get into business and they do, they live it and breathe it and they want to make it not only go well because they have to do that to make a living to pay their own bills, but they often forget. And, many, many never think about putting any money away for retirement. And, we try to help them. We try to get them to pay themselves first and use the profit first methods and try to really make sure that they're... Even if we just start out very small sticking some money aside and not only for retirement, but for everyday stuff. And, it's amazing.

 

Tony Mauro: Their eyes light up as soon as you start talking tax deductions for potentially putting money away.

 

Speaker 1: Right.

 

Tony Mauro: But, we try to help them through that because what we try to tell them is that unlike somebody working for somebody else, nobody's looking out for us. If you don't do this, you will have nothing but some Social Security and that's it.

 

Speaker 1: And, that's going to be lower than a lot of times than it might be if you were working for somebody else as a regular W2 employee, because if you're not paying yourself to my point earlier, or not paying yourself as much as you should be, well, your Social Security is going to be lower.

 

Tony Mauro: Social Security is going to be lower. And, we try to get them out of that mindset that you need to be paying something into Social Security.

 

Speaker 1: Right.

 

Tony Mauro: I mean, when a lot of people come to us, they say, well, I want to do my accounting, but here's what they'll say. I don't want to pay tax.

 

Speaker 1: Yeah, right.

 

Tony Mauro: And oh, by the way, I want a great retirement. Well, first of all, I mean, everybody's supposed to pay tax on their net income, their legal net income.

 

Speaker 1: Right.

 

Tony Mauro: And, you don't want to be afraid of that. You want to be able to make money. You want to be able to pay your share into Social Security, but that's not going to be enough. And, that's why we have to try to show them in some real numbers that, if you don't do anything, you're going to pour all these years into this and only have this much, and is that worth it?

 

Speaker 1: Well, and that's really where the topic of conversation this week comes in, because what is the value of it? What is your plan for retirement if you're not paying yourself properly or paying your future self? Again, that's a really important way of thinking about this. We put our heart and soul into our own small business, Tony, and we might think it's worth a lot more than it may be actually is. Or is the thing even sellable?

 

Tony Mauro: Yes.

 

Speaker 1: People will sometimes get into that situation where they're like, well, I've done all this, this, this, and this, and you know what you've sunk into it, but is there another person out there who's willing to take that on when you choose to retire? And, what does that look like in the process of selling that business? I think that's another underserved under talked about point of being a small business owner.

 

Tony Mauro: Yeah. It really is. Especially when you get into, if you're in your 50's and running the business and it's... Many business owners, I think, believe that, well, I'll either just run this until I die or if they want out, they think that it's worth much, much more than it really is. I mean, in almost all cases, they think somebody's going to come in and just buy them out and give them this big multiple of their revenue or net income. And, that's not the case. Especially in service businesses.

 

Speaker 1: Yeah. And that's all been changed too.

 

Tony Mauro: It's all been changed.

 

Speaker 1: Yeah.

 

Tony Mauro: And, it really is. Even if you take my business, I mean, I don't really have any assets. My asset is really my clients. And anybody that was going to come in and buy my business, they would be foolish to come in and cash me out.

 

Tony Mauro: And, I know that. They're going to want to pay over time based on how much business they can retain. And, I think that a lot of owners just think somebody's going to come and write them a big fat check and that's not going to happen. And I think my business, but we're always working on it, is much more systematized and able to run without me the key player than most.

 

Speaker 1: That's a great point. Yeah.

 

Tony Mauro: Yeah. Most businesses, owners, you take them out of the equation and the business just folds. Most people that want to come in and buy a business, they're looking to make money at it. They may or may not want to be you and work 12, 15 hours a day, weekends, things like that. They may want to hire this out. And if they do that, there may not be the money there that you take.

 

Speaker 1: Yeah.

 

Tony Mauro: And so, there's a lot of things to take into consideration.

 

Speaker 1: I really like that thought too, Tony, because often, we're talking small business here of course, and this can change as the business grows to a certain size and it kind of moves itself into a small, medium, or even a medium-sized business. But for a lot of small businesses, a lot of mom and pops if you will, if you want to use that kind of terminology, are you building a business or is the business you, right?

 

Tony Mauro: Right.

 

Speaker 1: So, if you're really the key thing and everyone knows you, and they enjoy coming to the place because of you and you retire, how does that make that viable for the next owner or for even let's say your children? Many people who have a small business think, hey, my kids are going to take it over. They're going to run it for me.

 

Speaker 1: Maybe one of your kids already works with you, or maybe they don't. I mean, there's so many questions there. They might not want it. They might not want anything to do with it. They want to have their own. I mean, there's just so many variables when you're talking about how to step away and transition into retirement, especially if you have not been paying yourself, which was kind of our key and most important point really.

 

Tony Mauro: Exactly.

 

Speaker 1: What do we do there, right? I mean, how do we go about rationalizing that when you're talking with people, do people think that far ahead? Are they kind of not really visualizing that?

 

Tony Mauro: Yeah. On the business side with the people we talk to that are our accounting clients, they never give it a thought. In fact, I'm going through right now as our first couple of Zoom meetings with these clients in 2021 and updating our communications. Because I ask them every year. Some of these questions that they don't think about is, and then I write it down so we can go over it next year saying, are we any closer to here's what you said last year, a year ago, because I took notes.

 

Speaker 1: Right.

 

Tony Mauro: And, what are we going to do here? Because, it doesn't make a lot of sense to keep going and going and going if you're not thinking about these. Because, there is going to be an end. I mean, it's inevitable.

 

Speaker 1: Yeah. Father Time catches everybody that's for sure.

 

Tony Mauro: Yeah. Yeah. I don't think enough business owners pay attention to it or like I say, they overvalue what the business is truly worth to outsiders.

 

Speaker 1: Well, let's circle back real quick to the family bit just in case. Because again, I know a lot of small businesses feel as though it's going to be a family affair. We kind of start it, especially if it starts to become successful. We think, hey, this is something a part of my legacy, right? That I can leave to family members. Some good thoughts to maybe ponder there. I had a business with some family members myself a couple of years ago. We did not think through the end point transition very well. And, it got a little ugly. And, it got a little unfortunate because we had some animosity between family members, and that's certainly not something that you want. Any tidbits or tips for us to ponder in that respect?

 

Tony Mauro: From what I see, and I haven't had to deal with that personally yet. Although I do have a younger son, who's now 25, but absolutely has no interest at this point in coming into the business. I wish he did.

 

Speaker 1: Right.

 

Tony Mauro: But, he's got to go out and live his own life and do what he can.

 

Speaker 1: That's true.

 

Tony Mauro: And, I think there's a couple things at play here. If you're going to have family involved, I think you really need to think it through. You need to sit down and decide. Let's say you have a son or a daughter that wants to come in the business is, how are they going to make a living while you still may need to make a living while you're teaching them the business?

 

Speaker 1: Mm-hmm (affirmative).

 

Tony Mauro: Because, you can't many times just step out and say, I'm not going to take anything because you're not quite ready to retire.

 

Speaker 1: Right.

 

Tony Mauro: And, they don't know the business and could run it right into the ground for you just because. And, I think that's one thing I would say, to get them in, start them slow, start them at the bottom and see if they like it, and see if they have the acumen to possibly grow into running a business. Many don't.

 

Speaker 1: That's a good point.

 

Tony Mauro: And then you end up fighting and you have a lot of say bad feelings about it and whatnot. But I think what most business owners do, what I see, is they'll have a son or daughter helping them kind of in the business and they think it's going to be just, okay, this person's going to take over. Many of the times that son or daughter says, you know what? I don't like this. I want out.

 

Speaker 1: Yeah.

 

Tony Mauro: And so, it doesn't work like that sometimes. A lot of times maybe they don't have the same work ethic you do as a father or mother. And, you want to kill them half the time when you're working with them. So, I think there's a lot on the emotional side. There's a lot on the financial side. I mean, if it ever gets to that. That you have to think through and get some advice on. It can work. And, I think all of us business owners would love nothing more to than to just, like you said, pass on, have a legacy, get your kids involved.

 

Speaker 1: Right, right.

 

Tony Mauro: And do that. But I think goes back to the first point though, you got to save for this retirement because you can't count on them running it and helping take care of you.

 

Speaker 1: Right. Or selling it or any of the other pieces we covered, right?

 

Tony Mauro: Yeah.

 

Speaker 1: And I would say on the family aspect, one other piece just from personal experience is, maybe treat it as though, especially if you plan to step away. If you plan to step away and have family, whether it's kids or siblings or whatever, go ahead and treat it like the sale that you would to any other person.

 

Tony Mauro: Right.

 

Speaker 1: And, I know that might be difficult. But if you can't do that, then maybe it's not the right situation. Because have some documentation in place clearly spelling out who's going to what, and what's going to happen. And, that can avoid some of those hurt family feelings down the pike. If you do it ahead of time going into it and everybody signs contracts or documents or whatever, then it's clear, right?

 

Speaker 1: There's clearly defined and it's not just kind of word of mouth. And unfortunately for many family-owned businesses, word of mouth is what happens, and I think that's where a lot of failures also pop up. Because, well, I never said that, and we never agreed to this, or come on dad or mom can't you cut me a break or whatever that might look like. And, you got to think about it in terms of what kind of pressure are you putting back on your own family if you go to retire and can't, and you've sold them or given them the business, and to your point, Tony, they're not able to quite run it the same way, now you've got to lean on them personally. In your personal retirement aspect, you need help in that reign. So it just can be very cyclical. And so, you've got to be really careful. And I think documentation, clarification, being slow, some of the tips that you brought up today, really good points.

 

Tony Mauro: Yeah. I mean, the legal stuff I think has to be in place for sure. But I think another thing, the thing that I thought of with my own business...

 

Speaker 1: Uh-huh (affirmative).

 

Tony Mauro: I think people got to think of is, the business has been good for me, per se. What's the model going to look like in 15, 20 years from now? And, if my son were to take it over, let's say. You know how fast things are changing these days.

 

Speaker 1: Yeah.

 

Tony Mauro: Is it still a viable business?

 

Speaker 1: Yeah.

 

Tony Mauro: When he's in his 40's. And boy I'd hate to have him just have, as any parent would, maybe not be able to run it just because of that. And then the next thing you know, he's got nothing and he's mid 40's, 50's and now what?

 

Speaker 1: Very true. Yeah. If you had a video rental business, right, you might've thought that was going to go on forever.

 

Tony Mauro: Right. So, I mean, I think all of us, whatever business we're in, always have to be thinking of that because stuff changes so quickly.

 

Speaker 1: Yeah.

 

Tony Mauro: With technology and whatnot.

 

Speaker 1: Well, it's the staples, right? I mean, one would think that, well, you know what? Bars and restaurants, people always will want to eat and drink. So we're pretty good there. Now, granted, there's a lot of them, so it's a fairly cutthroat business.

 

Tony Mauro: Right. Right.

 

Speaker 1: You've got to have a good product and so on and so forth. But then, we have something like the pandemic happen.

 

Tony Mauro: Yes.

 

Speaker 1: And how many wind up having to suffer through that, and maybe don't come back at all. So like anything, I mean, having a small business is tough. It's hard work. And sometimes it's a bit of luck, as well as a bit of that business plan and planning. There's a lot of components in there. And one of those things you can't forget to do is from the get-go, as we said with the first piece of this, pay yourself, pay your future self as well. Work it into the budget of the business so that no matter what happens, you are setting yourself up to be able to hopefully retire. Whether it's successful and you sell it off, or give it to the family or whatever the case is, whatever the end game is, that way you know you're set for your own retirement. Because, the concept of just working until we can no longer work, it sounds great.

 

Speaker 1: It doesn't always fall out the way we want it to. There's a number of things that can happen.

 

Tony Mauro: Yep.

 

Speaker 1: So, hopefully people picked up a couple of useful nuggets from today's show.

 

Tony Mauro: Yeah.

 

Speaker 1: Okay. All right. Anything else that we need to add to that, that I might've missed?

 

Tony Mauro: I would say in this area, my last tidbit is definitely reach out to whoever you use as an advisor, whether it's an attorney, an accountant, somebody to help work through these things, because there are a lot of issues at play here.

 

Speaker 1: Yeah.

 

Tony Mauro: And, I would seek a lot of advice.

 

Speaker 1: Oh, you know what? I did have a thought. So if you are paying yourself, or going to say, hey, you know what? I got a small business. This is good advice. I need to start doing this. We're not doing the traditional. Many of small businesses can't afford to set up plans for themselves or their employees. What's an avenue for them to maybe pursue putting some money away, Tony? Just a standard, just a simple IRA, some sort of a SEP? What's some thoughts there?

 

Tony Mauro: Yeah. Some easy stuff. If you're out on your own or only have a few employees, I mean, 401K's are great, but they have a lot of rules. And, you can't discriminate against employees and whatnot. And so, I mean, at its simplest form, just start a regular, traditional or Roth IRA, just on your own.

 

Speaker 1: Mm-hmm (affirmative).

 

Tony Mauro: Try to max it out. If you want to go a little further and you want to say, well, I want to be able to contribute more, than I would suggest a simple IRA and/or a SEP. And, ask your advisor about those plans because you can stick more in them. And, of course it helps you tax wise too. So it's a double-edge good thing or double whammy.

 

Speaker 1: Double whammy, there you go.

 

Tony Mauro: Yeah. Double whammy.

 

Speaker 1: Yeah. So, there's some avenues out there. And again, it is tough for small businesses to set things up for themselves and their staff. And so, it may just be something where you're doing just a simple retirement account for yourself. And that's why I kind of keep stressing that point of paying your future self. If you're 45 or 50 and you've got a small business that's doing pretty good, don't forget about the 65 year old version of yourself, right? So, it's a coming.

Tony Mauro:

It's coming.

Speaker 1:

So, give them some money to work with as well. All right. Well, that's going to do it this week for us here on Plan With the Tax Man. So if you've got a small business, hopefully this helped you out. If you need some help as Tony mentioned, reach out to someone, a qualified professional, to help set up a retirement account for yourself and whatever that might look like or even the business.

 

Speaker 1: And, of course Tony can help by simply giving him a call at (844) 707-7381. That's how you reach out to him at (844) 707-7381. Or you can always stop by the website, yourplanningpros.com. That's yourplanningpros.com. And, don't forget to subscribe to the podcast on Apple, Google, Spotify, whatever platform you use. Tony's been doing this for 23 plus years. He's a CFP and an EA, so a great resource for you to tap into. And, that's going to do it, my friend. I'm going to let you get out of here this week. Thank you so much. I'll let you get back into those tax documents.

 

Tony Mauro: [Oh boy 00:17:50].

 

Speaker 1: Hope you have a great week and I'll see you soon.

 

Tony Mauro: All right. Sounds good. Take care.

 

Speaker 1: Thanks for your time. And Tony, we'll catch you later here on Plan With the Tax Man with Tony Mauro.

 

Disclaimer: Securities offered through Avantax Investment Services.  Member FINRA, SIPC, Investment advisory services offered through Avantax Advisory Services.  Insurance services offered through Avantax Insurance Agency.