Regardless of whether one is an employee or entrepreneur, it’s natural for one to aim to have the best possible retirement plan in place so that one can enjoy his/her golden years with peace of mind. However, as an entrepreneur, retirement planning could be a little less straightforward and is subject to different considerations from those for an employee. Here are a few factors an entrepreneur needs to take into account when planning for retirement:
Cash Flow May Be Inconsistent
Entrepreneurs, particularly those whose businesses have not started to earn a constant and substantial profit and cash inflow every month, may not receive consistent income. Without a consistent cash inflow, the entrepreneur remains at the mercy of the unpredictable performance of the business, and that unpredictability makes it difficult, though not impossible, for entrepreneurs to inject much reassurance and stability into their retirement plans.
Personal Needs and Business Needs May Diverge
Although entrepreneurs are financially connected to their businesses, an entrepreneur may encounter situations where their personal needs and the business’ needs diverge or even conflict. For example, struggling entrepreneurs may find it difficult to set money aside to plan for their retirement as that could mean withdrawing funds from their businesses, which may not be in the best interests for the growth of their businesses. Successful entrepreneurs, on the other hand, need to be disciplined enough and set aside the surplus cash they earn in good times to prepare for uncertainties – such as when or if the business slows down – while making the best possible decision for their retirement plans.
Even the best investment strategy can be disrupted by financial emergencies. As such, it is crucial to set aside sufficient funds for emergencies and contingencies. The amount of emergency fund differs for every individual. Depending on his/her circumstances, a salaried individual consulting a financial expert may be told that it is best to set aside 3 to 9 months of their salary. However, due to the uncertain nature of an entrepreneur’s income, entrepreneurs may wish to set aside 6 to 12 months of their monthly expenditure before they start investing and enhancing their retirement fund. Please note that the ranges mentioned in this paragraph are ballpark ranges only; readers are encouraged to consult their financial adviser for their own situations.
Business Succession Considerations
Setting funds aside for their retirement may only be one of the many hurdles that entrepreneurs face. Entrepreneurs planning to sell or hand over their business upon retirement may find themselves in a sticky situation if they are unable to find a suitable buyer for their business or if their intended successor(s) have different plans. Hence, it is advisable to plan the succession and identify their successors early, and also implement measures to lock in business transfer arrangements as early as possible.
As such, entrepreneurs planning their retirement would benefit from engaging an independent financial advisory firm that offers retirement planning and business succession planning services as part of a suite of financial consulting services.
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Important: The information and opinions in this article are for general information purposes only. They should not be relied on as professional financial advice. Readers should seek independent financial advice that is customised to their specific financial objectives, situations & needs.