It’s not your imagination, it really is trickier!
This is the second in a series of articles on why as a business owner, retirement planning is different for you than it is for non-business owners. In short, not only do you have to figure out all the same difficult retirement planning questions that everyone else has to figure out, but you also have a couple of really big challenges that are unique to you as a business owner. In the first article I talked about the things everyone has to deal with in retirement planning. In this article I will start to go into some of the unique challenges business owners face.
Without a doubt, one of the main things that is different for business owners is the fact that they are business owners. Statistically, as a business owner, your business is likely to represent a big chunk of your net worth. In other words, you have a lot of your “eggs” in one basket. While concentrated positions can be a great way to get rich (think Bill Gates and Microsoft) the reality is that most businesses don’t make it past ten years, so having all your eggs in one basket can also be very risky. Being a business owner exposes your retirement plans to risks that non business owners are unlikely to face.
Assuming that the business is dependent on your efforts to be successful (a situation you’ll want to work on and the topic of future articles!) means that if something were to happen to you, the business could be negatively impacted. In this case, your retirement plans are subject to the operational risk of your business. Because the business represents a big part of your wealth, that means that when it’s struggling your ability to fund your retirement goals also suffers. Another way to think about this is that just because you get sick, that doesn’t make the value of your 401k account go down. That is probably not the case with your business. That’s why making sure your business can thrive without you is one of the things that as a business owner you need to be working on as part of your retirement planning.
Having a big chunk of your net worth tied up in your business also means your retirement plans are at risk if your business faces new or increased competition. This means your retirement planning is subject to competitive risk. What if a “big player” moves in and starts undercutting your pricing, or takes a few of your best customers? Profits for your business go down, and so does its value. This is very different from holding a diversified portfolio of investments. For example, in the big picture, while one company may gain a competitive advantage at the expense of another, in a diversified portfolio you might actually own positions in both companies, and the one company’s loss is offset by the gain in the other company. Net impact to your portfolio? Nada. That’s not the case when you’re a business owner. You probably do not own a position in your competitor’s business, so their gain could just be your loss. Not good.
As a business owner your retirement planning may be even more sensitive to market risks than someone with a more diversified portfolio. For example, a rising interest rate environment means that the cost for a potential buyer of your business to borrow money from a bank will be going up. That probably means that they won’t be able to offer you as much money to buy your business. With a diversified portfolio, you might actually have some exposure to some of those bank stocks, so that even when other companies are paying more, at least the banks are making more. That’s the power of diversification.
It’s the same idea with general downturns in the economy. Even during very bad economic conditions, some “defensive” companies, like food, utilities, and energy will do well because people have to buy this stuff, even in tough times. That may not be the case for your products or services.
Bottom line, while being a business owner can be a great way to build your wealth, it also exposes you to a lot of risk, and those risks need to be managed when preparing for your retirement. In my next and final article in this series, I’ll talk about one more big difference in retirement planning for business owners.
