Family friends in the United States have been forced to sell their home after their business went under. They are in their mid-sixties and the proceeds from the sale of their business, a very successful one before the recession, would have become their retirement fund. Now they have nothing to sell and their entire retirement nest egg has been wiped out. Apart from a sharp reminder of how severe this recession has been across the globe, it is also a lesson in retirement planning.
Many small business owners argue that it makes more financial sense to put money into their business rather than into a retirement fund. The returns are often better, especially in boom times, and they are in control, not some asset manager. The money can be better used as capital to expand the business which they will be able to sell when they retire, and in that way fund their retirement years.
What business owners forget is how risky this strategy is. Putting your retirement savings into your business is tantamount to investing your entire retirement nest egg into a single small company listed on the JSE. It makes no sense; one is simply putting too much at risk.
The financial disaster that has befallen these friends clearly illustrates the need for business owners to make sure that they have a portion of their retirement savings completely separate from their business. One should even consider holding retirement funds in a managed share portfolio where companies that are in the same sector as the business are excluded to ensure that there is maximum diversification. A financial advisor may also recommend a low-risk investment for the retirement fund considering that most of the business owner’s wealth is wrapped up in a high-risk venture.
Having your own business is a high-risk, high-reward adventure — just make sure you are not putting all your fragile eggs into a basket that will, by its very nature, experience a bumpy ride.