Retiring richly: Using business as pension, how can it go wrong?

Planning for one’s retirement has been identified as a ‘must’ factor if one is to have a meaningful retirement. The planning involves several activities including outlining the sources of income that would be available for retirement.

The number of options mentioned by persons we have met on this journey includes contributing to a scheme, building a business for the future, investments into various asset classes, acquiring property(ies) either as residential or corporate rentals, and even heard about children being used as sources of pensions, so we take care of them well today for them to reciprocate the gesture in our old age. I find the last option rather interesting!

It is worth noting that each of the options stated above is workable but has some specific risks associated with them. To optimize the plans yielding the expected outcomes one must identify these risks and make mitigation plans to offset the adverse effects should major plans fail to materialize.

One of them we look at today is the use of a business as a retirement income source or holding of shares of a company as your retirement source. There is absolutely everything right about it but what are the risks and what should be the mitigation steps? Just like any kind of investment mix, diversification remains one century-old practice to minimize the adverse effects of unexpected investment outcomes.

To consider using a currently running business as a source of retirement income, the business should be subjected to all the usual ‘going concerned’ analysis that ensures that the business would first and foremost be still around during your retirement. And if so, be able to generate the expected incomes to provide for the entrepreneur’s retirement needs.

Proponents of business strategy would always point to the rather tumultuous nature of business environments and how that determines the survival and performance of a business. The factors under consideration include competition from existing and future rival businesses, changing customer preferences, technological advancement, new regulatory requirements, and business succession.

All these have both individually and collectively caused the demise of businesses large, medium, and small, and more as a result of the emergence of the COVID-19 pandemic. Imagine someone who owned a chain of communication centres, or even the internet cafes, in the mid-nineties deciding then to use this business as their pension.

All know how this business has been made extinct by the mobile phone revolution. Growing up, we had some great retail businesses in town which just died due to competition and succession issues, and some of these businesses died when the first generation entrepreneur was still alive and by then would have greatly depended on their business to take care of them.

This is similar to holding the shares of a company that either goes bust eg. UT Bank (Ghana) or just fails to yield dividends (Aluworks, CPC, PBC, etc., all as companies in Ghana listed on the Ghana Stock Exchange - GSE). There are some business risk factors one could identify but some would remain hidden till the time is up for them to crystallize.

For these causes, three-fold mitigation is advised;

1. Employ the right people to run the business. With good systems for a business, it is more likely to grow and also survive the business risk factors aforementioned. This goes for all sizes of business.

This would even go for the typical SME business like community-based retail shops, mechanic shops, dressmaking, and others. If the business is not worth building it professionally, it is not worth considering as a retirement income option because empirical evidence supports the very high probability of extinction even while the primary entrepreneur is alive.

2. Plan succession for the business. If the primary entrepreneur is no longer able to be present to run as desired, the management or the leadership should not suffer. This second point actually hinges on the first point.

3. Diversify by contributing to a pension scheme. This is considered a very crucial activity for an entrepreneur to prepare or plan for retirement. This has been quite a difficult area especially for the self-employed in the informal sector.

It is very easy for an entrepreneur who saw all the money while actively running their business to just discount and disregard the level of income a formal pension scheme would give.

This is quite a common observation in most retirement advisory services. There is, however, empirical evidence of such business people who went through retirement the hard way and wished they were receiving the ‘pittance’ they once discounted.

Admission is made that, the avenues for such formalized plans were quite limited for the self-employed even 5 years ago.

However, the 3rd Tier arm of the new pension system offers the informal sector business person the option to join a formal pension scheme which would give them their lump-sum payment or buy some annuities that would pay monthly as the 1st tier SSNIT does.

Embracing this mindset by the typical entrepreneur is the objective of this article. To find a trustee is easy, just speak to the NPRA or visit their website. Only ensure you are dealing with a registered and a licensed trustee.

The third has been well elaborated because it stands as a more reliable option of diversification should entrepreneur even take the first two steps to preserve the business for retirement.

Great, if the business lives to take care of the owner, this other pension benefit becomes an additional income stream that would support the retirement lifestyle.

I love to end with a prayer that your business would stay long enough to take care of you in retirement, but again you also take all steps to manage the risks associated with it.