Locking up the leisure years
ENSURING A COMFORTABLE RETIREMENT NEEDS EQUAL PARTS PLANNING AND AND PATIENCE FROM BUSINESS OWNERS
After 25 years of running a successful mechanical contracting company, Donna Murison and her husband are ready to hand over the reins to one of their two children. But transitioning into retirement has not been simple, she says.
“Are we ready to retire? No question. But it has taken awhile because we both love working. That’s why the business has done so well. The challenge will now be how to fill that space in our lives.”
It took two years of working with financial advisors to make sure the transition went as smoothly as possible. “There were a lot of ups and downs,” she says. “When you’re transitioning a business, family dynamics — and life in general — can get in the way. However, our advisors were always there to keep us on track, even when things started derailing.”
Murison says that despite challenges along the way, retirement will bring them two kinds of freedom. “Financial freedom came with the success of the business. But it’s the time freedom that’s the most exciting part. If we go to the cottage, we don’t have to be back on Sunday anymore. It opens up a whole new world for us.”
For any business owner reaching retirement age, there are both qualitative and quantitative issues to consider, says Sandra Stewart, investment counsellor with RBC Phillips, Hagar & North Investment Counsel Inc. “The quantitative issues are about finances. Given that the business has been a source of cash flow throughout your life, the question then is do you have enough of an investment portfolio to sustain you for the rest of your life?” On the qualitative side, people aren’t always ready to retire right away. They worry about losing the satisfaction of engaging with people and not having enough activities to occupy their time. In some cases, there are family issues to contend with, especially when a business is being passed on to a child or other relative.
“For service-based businesses like independent consultancies, you may not have a business to sell,” Stewart says. “Shutting the doors might be the only option, so it’s essential to have as much as you need to retire.”
Whether transitioning a business on to a family member, selling to a third party or simply closing up shop, structuring your retirement is an integral part of the financial planning process, she adds.
plans are great. But your goal is where you want to go
“The transaction process is challenging enough. But you also have to consider whether you will structure your exit so that you continue to generate an income stream from the business, or establish a strong retirement portfolio, or both. All of that has to be achieved in the most tax-efficient way possible.”
The first thing you need to ask is what proportion of your net worth is your business, says Murray Shapiro, vice-president, high net-worth planning services for RBC Wealth Management Services. “Even if someone has a net worth of $5-million or $10-million, if it’s all in your business decisions need to be made about the source of your retirement cash flow. Does the business need to be sold in order to retire?
If your hope is to pass on a business to children, they may not have the resources to purchase it outright. “So then the question is, can you afford to retire without actually selling it,” Shapiro says. “If your children need you to take back a loan or you need ongoing dividends from the company, what if your children don’t run the company profitably? What happens to your retirement income then?”
Advance planning can help immeasurably, he adds. “The key word is diversification. Make sure you don’t have all your net worth in one basket.”
Where possible, owners should transfer funds not essential to the operation of the business into a holding company. This can be done on a tax deferred basis and will in some instances not only protect these funds from the ac- tivities of the business, but can be used to build an investment portfolio within the holding company, Shapiro says.
Then upon retirement, the owners can access funds from the holding company. “There are a lot of succession and tax complexities that go with that, but it’s very doable,” Shapiro says.
Owners can also opt to create an Individual Pension Plan, a defined-benefit plan into which their business corporation will contribute funds instead of the business owners contributing to a registered retirement savings plan.
“The business gets the deduction and the plan grows on a tax free basis,” Shapiro explains. “One of the biggest advantages is that there is more contribution room than an RRSP.”
Whatever the choice, Stewart says, the rule of thumb when retiring from business ownership is a simple one. “Know in advance what your target is, then build your plan to achieve that.”
Murison would agree. “Plans are great. But your goal is where you want to go. Our retirement planning took a bit of time and a lot of work, but we’re in the right place now and that’s what matters.”
This story was produced by Postmedia’s advertising department on behalf of RBC Wealth Management for commercial purposes. Postmedia’s editorial departments had no involvement in the creation of this content.