Tips for Transitioning From a Family Business to Retirement

Before you even begin to think about retiring, you need to be sure that you have a good plan for retirement. Shutterstock

A family business often operates quite differently from a traditional one. People in the family grow up working in the company and grow and mature along with it.

Such a trajectory can make it hard to break from the path because parents or grandparents always tell the family what to do and how to do it. It can make it harder for the elders to leave and relinquish power to a younger generation, but it will need to happen eventually.

Be Careful When Choosing Partners

Making your siblings or relatives partners can be great—for a while. Sooner or later, there will be an argument about the direction the business should go, and then the enjoyment of having your own business is gone. It can eventually destroy the company as those under you and your partner may develop loyalties to one or the other.

If you need the finances to grow your business, you may have to create a partnership—but do it with time. Giving stock in exchange for a loan to a relative may be a better option.

Develop a Succession Plan

Choosing the best successor for the business is extremely important because its future success depends on that individual. They need to be slowly groomed for the position, taking on more and more responsibility as they show themselves capable of handling it. At the same time, you can talk with them to determine if their goals for the company align with your own.

You might consider two individuals with promise and a genuine interest in the business a few years before your retirement. Without telling them they are being considered and trained for the position, you can determine which candidate may be the best candidate over time by their performance.

Before doing this, you need to ensure that any candidates for this position are interested in staying with the business. Many young people often have dreams and different career paths that may not involve sticking around.

Create Retirement Plans

Before you even begin to think about retiring, you need to be sure that you have a good plan for retirement. Do not wait until the last couple of years to put money into a retirement account. Start planning by using a retirement calculator to determine how much you will need—or want—and subtract Social Security from it to get a realistic figure.

Start Retirement Accounts Early

The earlier a retirement account is started, the more time you will have to gain compounded interest. You can use an IRA, 401(k), or other account for self-employed individuals.

If you have already created stock in your company, remember that there is the possibility that your successor could destroy the business. If that happens, the stock has no value until you sell it.

Reducing Your Tax Liability

Money contributed to retirement accounts, such as traditional IRAs and 401(k)s, is deductible, but you must pay taxes when you withdraw. Since the interest is constantly growing, you will save money on taxes if you pay them before contributing, which also reduces the taxable size of your estate.

Putting some of your money into a Roth account will enable you to withdraw the money tax-free. Roll over your money in IRAs or 401(k)s into a Roth account. You must pay taxes on the funds rolled over, but you will also have the advantage of not having to withdraw it for required minimum distributions (RMDs). You could even leave the money in the account for your heirs if it is not needed.

Any money in a Roth account must be left in it for five years before you can withdraw it without a penalty. If you have more than one Roth account, the five-year period applies to each one.

Account for Health Care Costs

As you plan for retirement and the costs involved, add the potential medical care cost. It can be costly if you or your spouse need long-term care. Fidelity says the average couple 65 and older can expect to pay $315,000 during their remaining years. Even worse is that health care costs increase annually.

One way to prepare for medical expenses and save money at the same time is to get a health savings account (HSA). You also must have a high-deductible health plan (HDHP) to get one. Contributions to the account are tax-deductible, and any money used for qualified medical needs is tax-free. Because there is a higher deductible, the costs of your premiums are lower.

An HSA also serves as a retirement account. It earns interest, the money in it then rolls over from year to year, and the cash can be used for any purpose without a penalty after you turn 65, but you must pay taxes on the withdrawals. Investopedia says there is a 20 percent penalty on withdrawals not made for medical purposes before you turn 65.

An alternative to help cover long-term care is to buy a whole life insurance policy. Add a long-term care rider to the policy, which will take some of its cash value and apply it to long-term care if needed. If you do not use it, your beneficiaries will still get the face value of the policy.

Retiring from your family business should be carefully planned. Ensure that your replacement is thoroughly trained and knows the ins and outs of the company before retiring. Business counselors can help you with business succession planning to ensure you do not retire prematurely.

The Epoch Times copyright © 2024. The views and opinions expressed are those of the authors. They are meant for general informational purposes only and should not be construed or interpreted as a recommendation or solicitation. The Epoch Times does not provide investment, tax, legal, financial planning, estate planning, or any other personal finance advice. The Epoch Times holds no liability for the accuracy or timeliness of the information provided.