As a business owner, your wealth is inextricably tied with the health of your business. However, you want to make sure that your wealth does not fully depend on your business. How can you diversify?
Many business owners put everything they can back into the business as it grows, and then ultimately sell part of the business or partner with an investor to begin to diversify. For these business owners, planning for retirement is on hold until their business can be monetized. But where does this leave you if you can’t sell your business for as much as you expected?
I think there’s a better path for growing wealth for business owners.
Diversify Your Wealth Building Strategy
If your business is your only driver of wealth, then your business becomes your priority in all situations. This kind of dependence on your business leaves you open to major setbacks if your business struggles.
If you create and regularly add to a separate investment portfolio, you can begin to diversify your assets. Creating an investment portfolio focused on a range of areas will allow you to insulate yourself from major losses in one area. Let’s say you own a technology business. You can create an investment portfolio that can help round out your concentration in that business sector, so your portfolio can help you withstand the ups and downs of the technology sector.
Consider Tax Savings From Retirement Plans
Setting up the right kind of retirement plan for your business and investing the maximum every year can create significant tax savings.
While the best plan for you will depend on the specifics of your business, tax advantage retirement plans like a 401(k) or cash balance plan can help you save on taxes now while building an income stream for the future.
Retirement plans are also a great way to attract and retain employees!
Read: What’s the Right Retirement Plan for You and Your Employees as a Small Business?
When you are planning on funding your retirement solely with the sale of your business, you are making two important assumptions. You are assuming that 1) You’ll be able to decide when you’ll sell the business and retire and 2) that the market for your business will be favorable when you are ready to sell.
However, there are many reasons that people have to sell their business before they were planning on it. Maybe life circumstances changed. Maybe you’re ready to do something new with your life. Maybe you are physically no longer able to run the business. Regardless, if you find yourself in the position of needing to sell the business in a down market, that can heavily impact the value of your business. When your entire retirement is dependent on that sale, you can easily end up in a situation where you have much less to live off of when you retire than you expected.
If you’ve planned ahead and you have more income streams that will fund your retirement, you have much more flexibility about when you can sell your business. This means you can wait for the right price.
Financial freedom is rarely built from a single source. As you grow your business, diversify your investment portfolio and save for retirement separately from your business. This will help you increase your flexibility and lower your risk as you move closer to realizing your exit plan.
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