As a business owner, you dream about the day you can sell your business and finally enjoy a comfortable retirement. But selling your business at a good price does not automatically translate into the retirement of your dreams. In fact, there are still two major obstacles you'll need to overcome if you want to use your proceeds to help support your desired retirement lifestyle.
The first, and typically most urgent, challenge you face is minimizing the enormous tax hit that often goes hand in hand with the sale of a business. It is quite likely that the looming tax bill will be the single largest payment you make to the IRS in your entire lifetime. So it is important that you and your financial professionals work hard to reduce this burden.
Fortunately, there are a number of tax strategies that may prove helpful to you during this transition. For example, consider maxing out your tax-deductible retirement accounts. You will have to pay tax on any withdrawals from these accounts in future years. However, paying income tax at a lower tax rate in the future may be a small price to pay for a large tax deduction in the year you are likely to pay taxes at a very high rate.
You should also make sure that you take full advantage of other tax deductions to which you are entitled. If your state offers a state tax deduction for funding a 529 plan, this may be a great time to set aside some money for college for members of your extended family. If your state and local income taxes are normally under the $10,000 limit, this may be a great year to prepay some of next year's property tax bill.
And if you're charitably inclined, there may be no better time to make gifts to your favorite charities. The key is to make all of your charitable contributions in the year you sell your business.
However, you can choose to stretch out the years over which your charities actually receive their money. This is done through something called a "donor advised fund." You make an irrevocable contribution to your donor advised fund the year you sell your business and then claim the full tax deduction to which you are entitled. You can then make non-deductible gifts to your favorite charities out of your donor advised fund at any point in the future.
After doing all you can to help minimize your tax bill, your next big obstacle is turning your business proceeds into a sustainable source of retirement income. This may not be as urgent as tax planning, but it can be far more complicated and prone to errors.
The biggest mistake business owners often make is confusing liquidity with availability. Just because you now have a lot of technically liquid assets does not mean that those funds are actually available for spending. It is quite likely that you will need most of those funds to help provide much needed retirement income for many decades into the future. So now is the time to decide what your long term income needs may be and the amount of assets you'll want to earmark for future spending.
Your job then becomes one of education. Start by understanding the major retirement risks such as out living your assets, experiencing lower than expected investment returns and having higher than expected expenses. Then educate yourself on the various retirement products and strategies that may be able to help you generate your desired level of future income.
By working hard to overcome the two big obstacles of taxes and future income, the sale of your business may just become your biggest contributor to an enjoyable retirement lifestyle.
• Jim Uren, CFP®, is a financial advisor in Buffalo Grove, IL with Phase 3 Advisory Services and offers securities through Royal Alliance Associates, Inc. (RAA), member FINRA & SIPC.