Business owner overview > Retirement planning

Prepare your business today so you can retire tomorrow

The income replacement value is what you need the business to be worth to maintain your current standard of living after you leave. This value is irrelevant to a potential buyer, but vital to any business owner looking to plan for life after the business. To determine the income replacement value of the business, add up the cost of all the benefits you realize from the business (such as insurance, travel, meals, rent, etc.), plus your salary and bonus, and divide it by a withdrawal rate you are comfortable with (typically between 3-5%).

The difference between the income replacement value and the value you believe you could sell the business for today is your retirement income gap. Business owners often realize that the income replacement value is higher than what they think the business is worth. This gap can be reduced by either determining ways to increase the value of your business or by growing the assets you have outside your business (savings, real estate, investments, qualified plans, etc.).

If you are planning on staying on the payroll in retirement be sure to document what your roles will be and agree on compensation equal to the value you are bringing back to the business. Instead of calling it a salary, business owners often call the compensation they receive from the business in retirement a “consulting fee.” While this arrangement may be good for the retired owner, it may not be in the best interest of the new leadership, especially if the sole reason is because you need retirement income.