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July 20, 2021

Small business owners risk coming up short in retirement

It’s not just individuals who are failing to plan and prepare for their retirement. Small business owners are no better, forced to choose between investing in the business today or putting something aside for a faraway goal.

AdSqueezed between slippery economic conditions and shrinking profit margins, almost half (49%) of those owning their own businesses are forced to make a decision over either contributing to their RRSP or making their business grow, according to a BMO Financial Group study.

Are you one of them? How do you balance the two? Are you hoping that you can tap the equity in the businesss down the road?

“Small business owners often find themselves torn between investing in their business and saving for the future,” suggests BMO VP Cathy Pin.

“Although it’s tempting to concentrate on investing in your business, it’s critical for entrepreneurs to have personal retirement savings as well, since they can’t rely solely on the future value of their business to provide for their retirement.”

That's why fewer self-employed Canadians (74%) reported they were financially prepared for retirement compared with those that are paid employees (85%), according to Statistics Canada.

Clearly, the bank wants your money. But tapping a business for retirement income can be tricky, particularly if the next generation needs the cash flow to keep things going.

That's why, if market conditions are not optimal for the selling of the business, retirement savings -- likely in an RRSP -- can act as a safety net, BMO maintains.

There's a tax benefit as well. For unincorporated small enterprises, money made in the business is considered personal income and therefore RRSP-eligible.

As a small business owner, do you set aside a regular amount for retirement? Or are you ploughing money back into the business to put it to work more effectively?

By Gordon Powers, MSN Money



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Gordon PowersGordon Powers

A long-time fund company executive, Gordon Powers now heads up the Affinity Group, a financial services consulting firm. Gordon was a personal finance columnist for the Globe & Mail for many years, has taught retirement planning...

Jason BucklandJason Buckland

The modern-day MC Hammer of money, Jason can often be seen spending cash that isn’t his with the efficiency of a Wilt Chamberlain first date. After cutting his teeth as a reporter for the Toronto Sun, he joined the MSN Money team with...