Key points:
  • Some of the most successful small-to-mid-size business owners often, and unintentionally, concentrate all their wealth in their company.
  • This can leave them too reliant on the sale of their company for funding their future retirement needs.
  • Advisors should proactively recommend that these business owners consider strategies — such as cash balance plans — for diversifying their assets ahead of retirement.
Business owners are a unique client segment to serve. These clients tend to pour everything they have into one company — their own. While this often proves to be a successful strategy for growing their business, it may not translate into growing their personal wealth. 
 
Picture this:
A business-owner client in their mid-60s has spent decades growing their business — cash flow is strong, and they believe the business is worth millions. They have achieved major life events — kids have graduated from college and their spouse has retired. Now the business is humming without the need for more capital. So, your client starts thinking, “What’s next for me?”
 
Then they start thinking about retirement, and about selling their business to fund their retirement. After discussions with several potential buyers, offers fall short of the owner’s perceived value for the business — and short of the amount needed to retire with confidence. 
 
The business owner may decide to hold out for a better offer, or they may try to grow the business further to attract that better offer. Either way, they shouldn’t have to rely solely on the sale of their business to retire comfortably.
 
Cash balance plans can be more effective than relying on the sale of a business
When it comes to retirement savings, common options like a 401(k) offer relatively low contribution limits ($23,000 deferral/$69,000 total before catch-up) compared with a cash balance plan — especially for someone trying to accelerate qualified savings after years of underutilizing a qualified plan. 
 
A cash balance plan allows your business-owner clients to contribute and defer significantly more than the common alternatives. It’s an employer-sponsored, qualified retirement plan that allows the employer to make contributions for eligible employees — including themselves.
 
These plans have evolved over the past several years and — with the help of a reputable third-party administrator and investment partner — they are now easy to run. Take a look at how a hypothetical scenario could play out.
 
A cash balance plan enables your client to be proactive about retirement — by allowing them to save more — instead of waiting for an offer on their business to retire. Plus, cash balance plans offer dollar-for-dollar income tax deductions up front, tax-deferred growth until distribution and the ability to roll assets into an IRA.
 
To learn more about cash balance plans or other ways to help clients maximize their wealth from work, contact your regional advisor consultant or visit us at Practice Management > Wealth at Work.
 
The views expressed in this material are the views of Columbia Threadneedle Investments through the period ended August 2024 and are subject to change without notice at any time based upon market and other factors. All information has been obtained from sources believed to be reliable, but its accuracy is not guaranteed. There is no representation or warranty as to the current accuracy, reliability or completeness of, nor liability for, decisions based on such information and it should not be relied on as such. This information is not intended to provide investment advice and does not account for individual investor circumstances. Investment decisions should always be made based on an investor's specific financial needs, objectives, goals, time horizon and risk tolerance.
 
Columbia Threadneedle Investments and its affiliates do not offer tax or legal advice. Consumers should consult with their tax advisor or attorney regarding their specific situation.
 
Columbia Threadneedle Investments (Columbia Threadneedle) is the global brand name of the Columbia and Threadneedle group of companies. Columbia Management Investment Distributors, Inc., 290 Congress Street, Boston MA 02210
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