Many successful business owners embrace their vulnerabilities and find ways to overcome them. They’ll admit to fears you may relate to — fear of failure, managing success, alienating loved ones, change, competition, rejection, and losing control as they delegate responsibility.

As a business owner, I empathize with most of that list. An additional concern that business owners either don’t consciously recognize or are loathe to admit is their fear of being unable to sustain their lifestyle in retirement.

The cost of delaying retirement for business owners

Daisy owns a transportation company in Springfield. She focuses on leasing buses to schools and chartering private tours. Her sister Catherine owned a similar company in Chandler, Ariz. Catherine’s company was slightly bigger, but overall, they were similar in terms of margin, revenue, product mix, etc.

When she was ready to retire, Catherine sold her company for a gross of $37 million. Compared to what the sisters read in industry journals, that sum was two multiple turns less than Catherine and Daisy had expected (they had expected a sale price of six times profit but sold at four times). Although a lower price than she had hoped for, Catherine’s financial adviser created a plan for her, and Catherine knew it was enough for her to maintain her lifestyle in retirement.

If Daisy commanded the same multiple, she would gross about $31 million. The devil is in the details, but we could assume that the after-tax net would be about $20 million for Daisy. However, she struggled to pull the trigger to join her sister in retirement. Daisy confided that she hadn’t sold because she was afraid of running out of money in retirement.

She had been pulling $300,000 of annual income from the business for years and was concerned she’d have to reduce her lifestyle if she converted her business to a portfolio of exchange-traded funds (ETFs) that invest in hundreds of the best-run companies on the planet. (Spoiler alert: Daisy and her heirs would be set for life if she sold her business for $31 million.)

The point about reinvesting the sales proceeds into a portfolio of publicly traded national and multi-national companies needs to be emphasized. Suppose a financial adviser had instructed Daisy to place the proceeds of her business sale into a single microcapitalization company headed by a retirement-age CEO with no succession plan.

In that case, the adviser should be fired and sued! Yet Daisy’s transportation company is exactly that (the only difference being that Daisy’s company does not have transparent, real-time valuation accessibility).

Daisy didn’t make a decision that could be classified as good or bad; she made a decision that felt right for her. Unfortunately, it was primarily made because she had gaps in understanding how to replace her paycheck. She could have made a more informed decision, even if it was the same one.

Retiring business owners need a paycheck replacement program, not just investments

Frank was a successful small business owner in his early 50s, running several construction companies and machine shops in Boston. When he sold his companies, he sought advice from a financial adviser who worked with the money management division of the national brand he banked with. The adviser, Joanne, is a standout participant in one of my coaching groups. I know her to be an effective communicator and an experienced professional.

Frank rejected Joanne’s comprehensive financial planning, estate planning and tax optimization offers. Not knowing the financial planning industry, Frank considered investment returns the only tool that should be pulled out of Joanne’s toolbox. Frank was a poor delegator of professional skillsets; he second-guessed Joanne’s investment decisions and blamed her when markets inevitably fluctuated. It felt more like he wanted someone to blame if things went wrong than a partner in planning his financial future.

Ultimately, Joanne had to part ways with Frank. His story is a cautionary tale: even savvy entrepreneurs need guidance when managing retirement assets. They need to be open to the possibility that they do not know all the answers and may not be aware of all the tools.

Still, investing is an important component of your paycheck replacement program. Shifting your mindset from running a business to managing an investment portfolio requires a different skill set and careful planning. There are several common pitfalls to avoid when transitioning to retirement investing.

Common mistakes business owners make when transitioning to retirement investing

• Overestimating returns. The stock market has historically returned about 10 percent annually over the long term, but many retirees expect much higher returns, setting themselves up for disappointment.
• Underestimating risks. That 10 percent average return comes with significant volatility, and retirees need to be prepared for market corrections and avoid panicked selling during downturns.
• Forgetting expenses. Many business owners fail to consider expenses previously run through the company, such as health insurance, travel and vehicles, leading to an underestimation of income needs.
• Neglecting tax planning. Taxes can significantly impact after-tax retirement income, making proper account structure and withdrawal strategies crucial.
• Not diversifying assets. Diversification is key to successful retirement investing. Spreading investments across different asset classes and account types provides better risk management and tax efficiency.
• “Set it and forget it.” Flexibility is also important, as retirement plans should be adaptable to changing life circumstances and market conditions.

Income planning should focus on supporting your lifestyle. It’s essential to build your retirement plan around personal objectives and desired lifestyle, not just financial targets. These goals should be discussed with your spouse or life partner, as retirement goals are often not clearly communicated and can be misaligned.

It’s crucial to plan for the unexpected. Building a cushion into your retirement plan for unforeseen expenses like health care costs, home repairs, and family gifts can help ensure financial stability throughout your retirement years. Successful retirement investing is both an art and a science. The science involves understanding market dynamics, asset allocation and tax strategies. The art lies in aligning your investment approach with your personal goals and risk tolerance.

Key advice for business owners approaching retirement

Maximizing the outcome of your investment portfolio is easier when you begin with a larger number. To get the largest check for your company, an owner should start preparing for a sale two to five years before an exit. This time is necessary to optimize the company for a transaction.

Owners should get a professional valuation. They should know what their business is really worth, not just what other companies like theirs sell for; they’re not the same. This forms the foundation of their retirement planning and can reveal weaknesses to shore up and threats to defend.

The human side of retirement planning

The most successful transitions occur when business owners have a clear vision for their post-business life. Ask yourself: What do you want your days to look like? What passions do you want to pursue? How do you want to spend time with family and friends? What impact do you want to have on your community?

These “soft” factors are just as important as the numbers. They give purpose and direction to your financial planning. Retiring business owners need to talk about matters of the heart before effectively discussing matters of the spreadsheet.

You’ve poured your heart into building your company as a business owner. The wealth you’ve created represents years of hard work, smart decisions, and probably a few sleepless nights. As you transition into retirement, managing that wealth requires the same level of care and expertise as running your business. Remember, the goal isn’t just to make you wealthier but to ensure that your wealth remains intact while you live the life you envision.

This article first appeared in the Berkshire Eagle on August 16, 2024.