# How does my business become my retirement?

By James Ustby, CFP®, APMA®. Canonical URL: https://jamesustby.com/owners-how-does-my-business-become-my-retirement

> Only if you answer four questions on purpose: how you are paying yourself and how much of it is being saved outside the business, which retirement plan you have for yourself and your key people, who runs or buys the business when you stop, and whether the business and your personal assets are protected from each other's creditors. Most owners have answered none of them, and the business is both their largest asset and their only one.

## The concentration nobody calls concentration

An owner with $2 million of business value and $150,000 in a retirement account is 93 percent in one stock, with no diversification, no liquidity, and a buyer who has not been found yet. Treated as a portfolio, that would alarm any planner. Treated as a business, it feels normal. It is not.

## Pay yourself in a way that gets money out of the building

The business should fund a retirement plan every year the same way it funds payroll. The plan you choose depends on headcount and income: a solo 401(k) for an owner with no employees, a SEP IRA for simplicity, a SIMPLE IRA for small teams, a full 401(k) with profit sharing when the owner wants to put away a lot and reward key people. For high-income owners with few employees, a cash balance plan can shelter far more. The right plan can move six figures a year out of the business and into your name.

## Succession is a retirement plan, not an estate plan

Who buys the business, when, at what price, and with what money? A child, a key employee, a competitor, a private buyer. Each path takes years to set up and most take a buy-sell agreement, a valuation, and often life or disability insurance to fund the purchase. An owner who has not started this at 55 is usually still working at 70.

## Protect each side from the other

A personal creditor should not be able to reach the business, and a business creditor should not be able to reach the house. Entity choice, titling, insurance, and the retirement plan itself (which has strong creditor protection) do most of this work. It is cheap to set up and impossible to fix after the lawsuit.

## A worked example

| Item | Amount |
|---|---|
| Owner, 52, business nets $400,000, 12 employees, $200,000 saved |  |
| Adds a 401(k) with profit sharing | Shelters a large owner contribution each year, rewards the two key managers |
| Names the operations manager as successor, starts a five-year buyout with a buy-sell funded by insurance |  |
| At 60 | Retirement account in the seven figures, business sold on schedule, income from both |
| Without the plan | The same owner at 60 has the business and not much else, and still has to find a buyer |

The plan design, the valuation, and the agreement each need a specialist. The owner's job is to decide to start, and to have one person coordinating the specialists.

## Questions people ask next

### What is the qualified business income deduction?

A deduction of up to 20 percent of qualified business income for owners of pass-through businesses, subject to income limits and rules by industry. It changes the math on how much to pay yourself as salary versus distributions, so it belongs in the same conversation.

### Do I need a 401(k) if I have no employees?

A solo 401(k) is often the most powerful option for an owner with no employees other than a spouse, because you contribute as both employee and employer.

### How is a small business valued?

Usually a multiple of earnings adjusted for the owner's own compensation, with the multiple set by industry and by how dependent the business is on the owner. Reducing that dependence is the single biggest lever on the price.

## Sources

- [IRS: Retirement plans for small businesses](https://www.irs.gov/retirement-plans/plan-sponsor/small-business-retirement-plan-resources)
- [IRS: Qualified business income deduction](https://www.irs.gov/newsroom/qualified-business-income-deduction)
- [IRS: One-participant 401(k) plans](https://www.irs.gov/retirement-plans/one-participant-401k-plans)

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Author: James Ustby, CFP®, APMA®, Wealth Advisor, LPL Financial, Durham and Chapel Hill, North Carolina. This material is for general information only and is not intended to provide specific advice or recommendations for any individual. Examples are hypothetical and for illustration only. Securities and advisory services offered through LPL Financial, a registered investment advisor. Member FINRA / SIPC. Certified Financial Planner Board of Standards Center for Financial Planning, Inc. owns and licenses the certification marks CFP® and CERTIFIED FINANCIAL PLANNER® in the United States to Certified Financial Planner Board of Standards, Inc., which authorizes individuals who successfully complete the organization’s initial and ongoing certification requirements to use the certification marks.