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Small Business: Restarting Your Retirement Plan

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When Rhett Power and his business partner began to build their dream company in 2007, they went all in. They combined their financial resources—about $750,000—to start Wild Creations, a Myrtle Beach, S.C.-based manufacturer and distributor of educational toys.  

For Power, the move included withdrawing $100,000 from his IRA and putting his overall retirement plan on hold by delaying his target retirement date. While risky and nerve-wracking—and not a recommended approach for most entrepreneurs—his decision paid off: Over the next six years, Wild Creations became one of South Carolina’s fastest growing companies and today employs nearly 40 people. But it was only after the company began making steady profits that Power could refocus on retirement and make up for the lost time and funds.

“You spend so much time focused on your business, thinking about 20 years from now and retirement [is difficult],” Power says. “You plan for everything as a small business owner. You plan to make payroll. You plan for inventory. Planning for your life gets pushed off.”

While many small business owners are faced with the reality that they may need to delay retirement, a growing number—like Power—are also going a step further and looking to retirement accounts to fund their businesses. Withdrawing funds from a retirement account early can result in penalties and fees, and it can take a long time to recoup the savings.

Fortunately, whether small business owners have delayed retirement, tapped into retirement savings, or both, there are ways to get back on track with retirement and transition planning after plans have gone awry, says Frank Goins, wealth advisor and senior vice president for SunTrust Private Wealth Management.

Revisit savings and cash flow

Particularly amid a recovering economy, Goins advises clients who stopped contributing to retirement plans during the recession to resume saving as soon as possible.

“During the Great Recession, a lot of business owners were looking to eliminate expenses, and unfortunately, a lot of retirement plans for the employees—and the owners—were reduced, suspended or discontinued,” Goins says. “Now, as the economy is recovering, we’re encouraging our clients—for retention of their key employees and their own sake—to reinstate retirement plans.”

He also advises owners to focus their efforts on streamlining personal cash flow.

“Retirement is more than a number,” he says. “Retirement is more of an equation. You have to understand your assets and opportunities for cash flows against the expenses and the lifestyle that you wish to lead.”

Goins suggests putting income streams in place so that you can balance future financial goals with your current lifestyle. A small business owner can weigh these factors by calculating what cash flow they'll need on a monthly or annual basis to realize their lifestyle aspirations.

Investing in real estate is one way to supplement your income before and during retirement.

Another option is consulting in retirement, either part- or full-time. In addition to a steady source of income, consulting can be an opportunity for business owners to smoothly transition into retirement while still contributing their expertise to their field. For example, a retiring business owner may have a successor, investor or purchasing company lined up to manage day-to-day operations, but she may want to stay on as a consultant to supplement her income and ensure the business remains successful in the future. 

Know the value of your business

In 2009, two years after Power’s company began to gain traction, he and his partner were able to replenish what they had withdrawn from their personal retirement plans. But they still had a lot of catching up to do in terms of saving for the future. So they decided to sell Wild Creations and stay on as shareholders.

“Business owners are looking harder at their business as a long-term solution to their cash flow needs,” Goins says.

He explains that growing a business as much as possible to build up a sufficient nest egg for retirement—and then selling the company—is a popular approach. After a sale, the proceeds can quickly transition to savings for selling owners.

In recent years, a growing number of business owners have delayed retirement and the sale of their businesses in an effort to “wait out” the down economy in the hopes that the company’s value will improve as the economy bounces back. While this plan has worked out for some, other business owners have found it difficult to cash in and have fallen short of their long-term goals. Goins says that success depends on the market, the industry, business models and a number of other factors.

In Power’s case, he immediately replenished his savings after the sale by putting three-quarters of the sale’s proceeds into a retirement account, and the rest into an account for a future entrepreneurial venture. While his strategy paid off, he doesn’t recommend it.

“If you can avoid tapping into your retirement funds, please do it,” Power tells them. “It can be tough to catch up.”


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