You've nurtured your business, but have you paid the same attention to your retirement?
Some business owners focus a lot of time and energy making plans for the future of their companies. When it comes to their personal financial futures though, many are ill-prepared, a new RBC Wealth Management survey shows. Of the business owners surveyed, 49 percent indicated they don’t have a will, and 22 percent have not started any formal wealth transfer planning.
“Business owners, in general, have a very difficult time separating their professional lives from their personal lives,” says John Younger, head of Client & Business Development at RBC Wealth Management in London. “They do tend to pride themselves on being in control and aware of business trends, but tend to overlook things on the personal front.”
Without a proper personal wealth plan, business owners could find themselves working longer or living more frugally in retirement than they had hoped. “Some business owners want to keep working until they die, but the prudent advice is that you need to prepare for possible retirement,” Younger says.
While they may need to map out the future of their personal wealth, the survey shows business owners are better prepared than other types of professionals: 39 percent of business owners have a wealth transfer plan in place, compared to 26 percent of all employed professionals measured. The survey also shows business owners with more than US$10 million (£ 7.76 million) in assets are three times more likely to have a full wealth transfer plan compared to those with less than $1 million.
The survey, which included 384 business owners in Canada, the United States and the United Kingdom shows the British are the most proactive when it comes to educating themselves on finances. About two-thirds (64 percent) of respondents do their own research to improve their financial literacy, compared to 55 percent in the U.S. and 52 percent in Canada.
“This independent approach to learning reflects respondents’ deep sense of responsibility over wealth,” the report states, adding that nearly three-quarters of British respondents felt personal accountability for understanding their financial affairs. A quarter also cite family governance and wealth transfer as important, compared to just one-in-five respondents in North America.
Younger and his team help business owners in Britain use their knowledge and sense of financial responsibility to plan for the succession of the business and, eventually, their own retirement.
Younger describes them as “wealth challengers,” prompting clients to think about what retirement means and looks like to them. That includes whether to sell or transfer the business, and when. Owners will also need to set aside money for themselves, their children and possibly charities.
With a sale, owners are most likely to sell to a partner or a third-party, seeking full value for the company. Some owners may choose to transfer or gift the business to a child, with an option to retain shares or draw income as an employee or consultant to help fund their retirement.
Owners considering a transfer of the business to one or more children need to determine if they actually want to carry on with the company. “Many don’t,” says Dion Lindskog, head of wealth structuring at RBC Wealth Management in London. “Often, the kids are more interested in pursuing their own careers.”
It can be a tough conversation, on both sides. In some cases, one child may want to be in the business, while others don’t, even if they have been in the past. That’s where many owners struggle to find the best way to divide their assets among children in a fair and equitable way.
“The biggest challenge for business owners when it comes to wealth transfer is that they desperately want to treat the next generation in a very fair manner. Striking the balance can be difficult,” Younger says.
Owners may also want to donate to charitable causes as they exit the business. “Many business owners take great pride in being generous through their retirement by giving back to the society that was the framework that allows them to be successful,” Younger says.
Owners should also consider setting aside funds for retirement long before they even consider selling or transferring the business, Lindskog says. He often recommends owners set up their own personal pension plan, as they would for their employees.
Owners sometimes shun the idea. “The common phrase is that, ‘My business is my pension,'” Lindskog says. While that may be true, he still suggests a pension as a safety net, just in case the business doesn’t succeed as they had hoped.
“Why put all of your eggs in one basket? Have at least two options: your business and a pension on the side,” Lindskog says.
“Sometimes the business isn’t going to provide the level of income you need, so you can end up with people having to work far later than they’d ideally like to. You end up with a very disappointing retirement.”
This publication has been issued by Royal Bank of Canada on behalf of certain RBC ® companies that form part of the international network of RBC Wealth Management. You should carefully read any risk warnings or regulatory disclosures in this publication or in any other literature accompanying this publication or transmitted to you by Royal Bank of Canada, its affiliates or subsidiaries.
The information contained in this report has been compiled by Royal Bank of Canada and/or its affiliates from sources believed to be reliable, but no representation or warranty, express or implied is made to its accuracy, completeness or correctness. All opinions and estimates contained in this report are judgments as of the date of this report, are subject to change without notice and are provided in good faith but without legal responsibility. This report is not an offer to sell or a solicitation of an offer to buy any securities. Past performance is not a guide to future performance, future returns are not guaranteed, and a loss of original capital may occur. Every province in Canada, state in the U.S. and most countries throughout the world have their own laws regulating the types of securities and other investment products which may be offered to their residents, as well as the process for doing so. As a result, any securities discussed in this report may not be eligible for sale in some jurisdictions. This report is not, and under no circumstances should be construed as, a solicitation to act as a securities broker or dealer in any jurisdiction by any person or company that is not legally permitted to carry on the business of a securities broker or dealer in that jurisdiction. Nothing in this report constitutes legal, accounting or tax advice or individually tailored investment advice.
This material is prepared for general circulation to clients, including clients who are affiliates of Royal Bank of Canada, and does not have regard to the particular circumstances or needs of any specific person who may read it. The investments or services contained in this report may not be suitable for you and it is recommended that you consult an independent investment advisor if you are in doubt about the suitability of such investments or services. To the full extent permitted by law neither Royal Bank of Canada nor any of its affiliates, nor any other person, accepts any liability whatsoever for any direct or consequential loss arising from any use of this report or the information contained herein. No matter contained in this document may be reproduced or copied by any means without the prior consent of Royal Bank of Canada.
Clients of United Kingdom companies may be entitled to compensation from the UK Financial Services Compensation Scheme if any of these entities cannot meet its obligations. This depends on the type of business and the circumstances of the claim. Most types of investment business are covered for up to a total of £85,000. The Channel Island subsidiary is not covered by the UK Financial Services Compensation Scheme; the office of Royal Bank of Canada (Channel Islands) Limited is a participant in the Jersey Bank Depositors Compensation Scheme. The Scheme offers protection for ‘eligible deposits’ up to £50,000 per individual claimant, subject to certain limitations. The maximum total amount of compensation is capped at £100,000,000 in any 5 year period. Full details of the Scheme and banking groups covered are available on the Government of Jersey’s website www.gov.je/dcs or on request.
We want to talk about your financial future.