Family businesses often operate in a completely different way compared to traditional corporations. Family members grow up working in the company, evolving and maturing alongside the business.
This trajectory can make it difficult for individuals to stray from this path, as parents or grandparents often dictate what should be done and how it should be done. This dynamic may make it challenging for older generations to pass the torch to the younger one, but ultimately, this transition needs to happen.
Having your siblings or relatives as business partners might seem great – for a while. However, disagreements about the direction of the business are bound to arise, leading to the loss of the joy of owning a business. It could eventually lead to the demise of the company, as employees may develop biased loyalties towards you or your partners.
If you require funding to expand your business, establishing partnerships may be necessary – but it takes time. Giving stock to relatives in exchange for loans could be a better option.
Selecting the best successor for your business is crucial as its future success hinges on that individual. They need to gradually prepare for the position, taking on more responsibilities as they prove their capability to handle the role. Simultaneously, you can engage in conversations with them to ensure their goals align with those of the company.
Consider having two promising individuals interested in the business a few years before your retirement. You don’t need to inform them that they’re being considered for the role and being trained for it; over time, you can evaluate their performance to determine the most suitable candidate.
Before executing this plan, ensure that any candidates for the position are interested in staying within the company. Many young individuals often have dreams and different career paths, so they might not necessarily want to remain in the family business.
Before contemplating retirement, ensure you have a solid retirement plan in place. Don’t wait until the last few years to contribute to your retirement account. Begin formulating a plan using a retirement calculator to determine how much money you will need or want and subtract social security to get a realistic figure.
The earlier you start your retirement account, the more time you have for compound interest to work. You can utilize a self-employed individual’s IRA, 401(k), or other accounts.
If you’ve created stock within the company, keep in mind that your successor could ruin the business. In such a scenario, the stock holds no value until you sell it.
Funds deposited in retirement accounts, such as traditional IRAs and 401(k)s, can reduce taxes, but you will be taxed upon withdrawal. By paying taxes on contributions before depositing, you save on taxes and reduce the taxable portion of your estate as interest accrues.
Placing some of your funds in a Roth account allows tax-free withdrawals. Transfer your IRA or 401(k) funds to a Roth account, paying taxes on the rollover amount. The benefit is exemption from required minimum distributions (RMD). If you don’t need it, you can even leave the money in the account for your heirs.
Funds in a Roth account must remain for five years before penalty-free withdrawals. The five-year term applies to each individual Roth account.
When calculating retirement expenses, include potential healthcare costs. Healthcare expenses can be costly if you or your spouse require long-term care. Fidelity estimates that couples aged 65 and over may need an average of $315,000 for health care costs in their remaining lifetime. Moreover, healthcare costs continue to rise annually.
One way to prepare for medical expenses while saving money is to have a Health Savings Account (HSA). You must have a high deductible health plan (HDHP) to qualify. Contributions to the account are tax-exempt, and any funds used for eligible medical needs are tax-free. Due to the higher deductible, your premium costs are lower.
An HSA can also serve as a retirement account. It earns interest, and the money rolls over annually, allowing penalty-free cash withdrawals for any purpose once you turn 65, although withdrawals are taxable. Investopedia notes that non-medical withdrawals before turning 65 are penalized at 65%.
Another option to cover long-term care costs is to purchase permanent life insurance. Adding a long-term care rider to the policy allows it to draw on a portion of its cash value for long-term care if needed. If unused, your beneficiaries still receive the policy’s face value.
Careful planning is essential before retiring from a family business. Ensure your successor has undergone comprehensive training and understands the ins and outs of the company before you retire. Business advisors can assist in crafting a succession plan to ensure you do not retire prematurely.