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Retirement planning: 4 golden rules for small business owners

3/8/24 6:25 AM

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Running a small business is an all-consuming task! It takes all your passion, drive, and financial wherewithal to start and grow your business. It is quite natural then that retirement planning might be your last priority. But that is a rookie mistake. As a business owner, you are susceptible to financial uncertainties and while you may have the flexibility to retire later than ordinary working professionals, retirement planning needs serious consideration.

Small business owners face unique challenges often leaving limited money to invest for retirement. Some of these challenges are:

Cash crunch: Small businesses struggle with inadequate working capital, hindering their ability to recover outstanding debts promptly. This forces them to seek financial aid, such as working capital loans, exposing them to additional risks.

Absence of a retirement provision: Salaried individuals have a retirement provision typically built into their income streams EPF, wherein the employer also contributes/matches funds. Business owners do not have these benefits which makes saving for retirement even crucial.

Balancing business investments and personal savings: Entrepreneurs must balance reinvesting profits into their businesses with saving for retirement. Neglecting personal savings can lead to financial strain later on.

Once entrepreneurs navigate the ambiguity of cash flow, retirement becomes an inevitable reality. Here are a few pointers to kickstart your retirement planning journey.

Master the 20:20 rule: Given your flexibility to retire late, you can start retirement planning in your 50s (by then your business is established). Assuming you retire at 70, you have at least 20 years to expand your investments. 2 decades, to invest for your next 2 decades.

Embrace the 30X thumb rule: Save 30X your annual expenses for retirement. For example, with annual expenses of ₹25,00,000 and a retirement in 20 years, aiming for a ₹7.5 Cr portfolio is recommended. However, factoring in a 7% average inflation rate over 20 years, you might need a portfolio closer to ₹20 Cr to sustain your standard of living.

Ace your insurance game: Secure your dependents with term life insurance, aiming for coverage at least 10X your income, while adjusting as liabilities evolve. This serves as a foundational element in this risk management strategy providing your loved ones with financial security and stability in the likelihood of any adverse eventuality. Similarly, with medical inflation touching roofs, prioritising health insurance is must. The sooner you buy a health cover, the cheaper it will be for you.

Diversify your assets to maintain financial stability: Allocate 35% of your funds in equity markets or mutual funds, 35% in guaranteed return options like participating products for consistent long-term returns and regular bonus payouts. Allocate 20% in security nets such as term insurance or annuity plans, and 10% in riskier or illiquid assets like real estate or NFTs to prevent loss of principal money. Regularly monitor and adjust your portfolio to adapt to changing market conditions and mitigate against market shocks.

Lastly, planning for an exit strategy is crucial for small business owners, especially when considering retirement. It's common to feel an obligation to keep the business running, but everyone deserves to enjoy their golden years. Options for transitioning out of the business include passing it on to family members, selling to a corporation or dedicated employee, or partnering with someone to handle day-to-day operations while still being involved. Ultimately, having a clear exit plan ensures a smooth transition and allows for the enjoyment of retirement.Anup Seth, Chief Distribution Officer, Edelweiss Tokio Life Insurance