If you’re a business owner, retirement might be the last thing on your mind. Instead, you’re thinking about making and selling your product or service, managing your staff and paying the bills. But chances are, the day will come when you’ll be ready to pack it in.
Right now, the very idea of stepping away might be unthinkable. You’ve put your heart and soul into your business. So, you could simply choose to put off thinking about it a while longer. Or, you could start planning for it today. Some preparation now could help the transition between your working years and your retirement go more smoothly.
Tammy Nancoo, 59, has a fairly open-ended view of retirement. Her dance costume business is thriving, and she has no desire to lay down her shears. “I enjoy my work and the community I work with,” she says. “I plan to mentor the people who will eventually take over some of my job. That way, I can focus on the areas I find most energizing. I’ll be able to stay as active as I want, and still have time for some semi-retired interests.”
Software company owner Wally Vogel, 60, has a more concrete strategy for retirement. “My dream is to retire and have time for writing and travelling with my wife, Jane,” he says. “So, I hope I can retire while I still have some faculties for that. Hopefully, in four or five years.”
Vogel’s plan is quite simple. “Right now, I am one day from retirement – and that’s the day that I sell the company, or at least sell my shares in the company. The succession plan should not be a problem. We’re building a strong leadership team and I have no problem letting go the reins when the time comes.”
Whether you plan to retire sooner or later, there are many operational, legal and tax aspects to consider. Let’s start by focusing on your retirement income. How much do you need, and where will it come from?
How much will it cost you to live in retirement?
This question is about monthly or annual cash flow, and the number is uniquely yours. It doesn’t have to be complicated. Begin by making a budget. Review what you’re spending in your personal life now, and what you think you might spend once you retire. Some expenses – food, shelter, utilities – might stay about the same. Some – transportation, clothing, saving for retirement – might decrease. And some – travel, hobbies – might increase. Your retirement budget will depend on the kind of life you expect to lead in retirement. Your calculations won’t be all that different from someone who doesn’t own a business. But don’t forget to factor in inflation – and how it may affect your retirement.
Where will your retirement income come from?
This question is about sources of retirement income. When you add it all up, how close will you be to your income goal? And how much more will you need to save to make up the difference? This is where the picture can look different for business owners.
Here are seven possible sources of retirement income for people like you:
1. Sale of the business
Start by asking yourself: “Can I sell my business?” And then: “For how much?” And finally: “To whom?”
Does your business depend almost exclusively on your personal expertise? For example, you might run a consulting or freelance business. If that’s the case, you’ll probably shut it down when you retire. But your business could have assets like equipment, inventory, intellectual property, a client list or goodwill. In that case, it could be a good candidate for a sale. The buyer could be an existing business partner or a family member. You could even sell to an unrelated third party. Before you sell, you’ll want to take inventory of what your business owns. That will help you determine its value. It’s also wise to talk to your tax advisor about the Lifetime Capital Gains Exemption (LCGE). The LCGE gives you the opportunity to keep more money in your pocket. See the Canadian Federation of Independent Business (CFIB) for some useful information on the LCGE.
2. Canada Pension Plan (CPP)/Quebec Pension Plan (QPP)
CPP/QPP retirement pension is a monthly, taxable benefit that replaces part of your income when you retire. If you qualify, you’ll receive the CPP/QPP retirement pension for the rest of your life. You can log into your My Service Canada Account for CPP or My Retraite Quebec Account for QPP to find out what your benefit could be. The payment you receive will be based on the contributions you made over your working life. As a business owner, you must have paid both the employer and employee contributions to draw a CPP benefit.
3. Old Age Security (OAS)
The Old Age Security (OAS) pension is a monthly payment you can get if you are 65 and older. The amount you receive depends entirely on how long you lived in Canada or specific countries after the age of 18. OAS doesn’t require contributions from you, like CPP does. Since you are a business owner, it will therefore likely form the foundation of your retirement income. It’s important to note, however, that if your income is above a certain amount, the government will “claw back” some of your OAS payment. If your income is high enough, the government will take back your entire payment.
4. Registered retirement savings plan (RRSP)
There are three key advantages to registered retirement savings plans. First, removing funds from a corporation to invest in RRSPs can be tax neutral. That means you save tax when you put money in, but pay tax later, when you take it out. Second is the potential creditor protection. If you have debts, your creditors can’t touch the money in your RRSP. Third is the ability to make spousal contributions and the potential to use pension-splitting rules. That can happen after age 65, when you convert your RRSP into a registered retirement income fund (RRIF). To find out how income-splitting can work for you, speak to your advisor.
5. Tax-free savings account (TFSA)
A lot of people, including business owners, don’t think of a tax-free savings account as retirement savings. Instead, they will often use it for a rainy-day fund, a major purchase or a nice vacation. Those are all good ways to use a TFSA. However, between contributions and investment growth, you can accumulate a considerable amount within a TFSA. (If you’ve never owned a TFSA, as of January 1, 2023, and if you turned 18 before the year 2009, you can contribute up to $88,000 to it.) So, TFSAs can be a very powerful tool. A TFSA is an effective way to build another tax-efficient source of retirement income.
6. Dividend distributions
Another source of income in retirement could be dividends from your corporation. Suppose you hold onto some of the equity in your Canadian corporation after you retire from running it. The dividends from those shares can form part of your income. Talk to your advisor to find out whether your business qualifies.
7. Individual Pension Plan (IPP)
An IPP is a pension savings plan that you set up as an individual, rather than as part of a larger group. It works like this: You can invest whatever money you contribute to it, and your contributions are tax-deductible. An IPP is an efficient way for you to take money from your business’s profit or savings. It lets you bypass certain rules around passive income, and avoid taxation. Like any pension, you can split the income from a IPP with your spouse or significant other. And again, like an RRSP, your assets are safe from creditors. Your advisor can help you set up an IPP. NOTE: Your business has to be incorporated in order to set up an IPP.
The importance of expecting the unexpected
Vogel has some other advice for fellow business-owners.
“If I had to do it over again, I would’ve saved more money at an earlier age,” he says. “We thought we were putting aside adequate savings. But along our journey, we were hit with unexpected health challenges. They took a toll on our ability to work as well as on our finances. For example, I had two years of cancer treatments in the United States. The good news is they saved my life. The bad news is they took a huge toll on our savings.”
One of the best ways to protect your savings is with health insurance – including critical illness insurance, personal health and dental insurance, and long-term care insurance.
Preparing for the unexpected – by saving money and buying insurance – is just one part of retirement planning. Planning your finances can help achieve your goals in life. It will help you figure out where you are today, where you’re going, and how best to get there.
This article is meant to provide general information only. Sun Life Assurance Company of Canada does not provide legal, accounting, taxation, or other professional advice. Please seek advice from a qualified professional, including a thorough examination of your specific legal, accounting and tax situation.