Unlike employed individuals who tend to take a break from work after retirement, entrepreneurs and self-employed professionals continue to be actively involved in their business/profession as long as they are physically fit. Thus, advisors need to deal with entrepreneurs with a different approach for planning their retirement.
Hemant Rustagi of Wiseinvest Advisors says that unlike employed people who get retirement benefits through employee provident fund, pension etc. entrepreneurs are on their own and thus they need to plan for retirement proactively. “Businessmen need to start saving more proactively on their own. They need to diversify and invest in other asset classes apart from their business.”
Nikhil Kothari of Etica Wealth Management says that the first thing entrepreneurs should do is to build a kitty for household expenses. “The first thing we do is to estimate household expenses. This is different from a contingency fund. Household expenses include a lot more expense as compared to a contingency fund. You have to help entrepreneurs maintain the same lifestyle even after retirement.”
Household expense can include lifestyle expenses such as shopping, dining, car fuel and so on while a contingency fund takes care of bare minimum needs of an individual which include, rent, food bill, EMIs, school fee, etc.
To create a nest egg to take care of household expenses, Nikhil says that advisors need to convince entrepreneurs to diversify their savings in financial assets.
Diversify
“Entrepreneurs are stocks. They need to balance and invest in bonds. Advisors need to break the ice and convince business owners,” says Rajesh Chheda of Finance Factory.
Entrepreneurs generally prefer to invest in their own business as they believe that their business can generate higher returns compared to other asset classes. While this may be a valid assumption, financial advisors need to convince entrepreneurs to park a portion of their earnings in financial assets to create a corpus which would help them during retirement. The returns generated by a business can be astronomical as compared to other financial assets, but there is no certainty of income. The business can suffer due to unforeseen factors like competition, change in policy, falling demand, etc.
Unlike salaried individuals who invest a fixed sum of money through SIPs at regular intervals, business owners have flexibility of investing more. They can put lump sum money as and when they get cash flows to fund their retirement.
Insurance
After household expenses are taken care of, medical and life insurance are important safeguards which entrepreneurs need. “The life insurance requirement for a young entrepreneur would differ from an entrepreneur who is 45 years of age. We estimate human life value if the client is young and for elderly clients we arrive at a number after doing need based analysis,” adds Nikhil.
Selling business to fund retirement
Some business owners tend to depend solely on selling their business as a means to fund their retirement. Business owners can make a windfall by selling their venture, but it is best they fund a retirement kitty by saving a portion of their profits in financial assets. Depending solely on business sale to fund retirement can be a risky bet.
Nevertheless, advisors say that entrepreneurs need to have a realistic expectation of how much valuation they can get for their business as the fortunes can change due to unforeseen events. Also, advisors say that entrepreneurs need to make themselves redundant. This means that their business should function smoothly in their absence. If the business has no value without its founder, then the spouse or dependents may suffer hardship, say advisors. “It is not advisable to depend solely on selling business to fund retirement as the business can go bust,” advices Hemant.
Do not dip into retirement kitty
Whether a salaried or a self-employed professional, clients may be tempted to dip into retirement kitty to fund other goals. Advisors say that entrepreneurs should not withdraw from their retirement savings to fund their business.
To conclude, just like business owners diligently take care of their company’s finances, it is important for them to plan their finances.
