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Employees of publicly traded companies are often granted company stock as part of the compensation package. From a portfolio management perspective, holding outsize amounts of stock in the same company that provides income can increase risk. If the business were to become wobbly, not only would the stock decrease in value, but the employee could also potentially find themselves out a job. Employees who are granted stocks often mitigate this risk by selling some of the company stock and reinvesting it in other assets, to diversify growing wealth away from the source of income.
But what about when you own your business? The situation becomes more complex. One strategy that is often followed is to put everything except living expenses back into the business while you are growing it, and then sell part of the business or take on a strategic investor to help you begin to diversify elsewhere. Retirement planning is put on the back burner until the business has grown to a point where the business can be monetized.
But we think there is a more thoughtful approach that works well for many investors.
While it may seem like a good idea, relying solely on your business as your source of wealth can expose you to a lot more volatility than you think. Whether it is saving for a rainy day, or longer-term goals like retirement, if all your wealth is tied up in your business, your business dictates your moves. Creating and regularly adding to a separate investment portfolio diversifies your assets effectively. And if you invest away from areas, you are already exposed to in your business, it can be a powerful tool to help you smooth volatility across both your business and life. For instance, if your business is vulnerable to cyclical sectors, you will want to create an investment portfolio that is defensive against those sectors. Creating a portfolio that is not correlated to your business expenses or to your busy/slack seasons can mean that you will be able to use your investment income to bolster your business if you need to.
There can be significant tax advantages to setting up the right kind of retirement plan for your business and ensuring that you set aside money to invest as close to the maximum as possible every year. While there are of course upfront fees and ongoing costs associated with formal retirement plans, they also allow you to save in a very tax-advantageous manner. Depending on your situation, a 401(k) plan and a cash balance plan are tools you can use to save effectively and look towards a future income stream you can access without having to sell your business. They can also be a great way to attract and retain talented employees.
When you are putting everything back into your business with the idea that you will eventually fund your retirement by selling all or part of it, you are essentially making two bets: That you will be able to sell when you are ready and not before, and that when you are ready the market for your business will be at a good point for an exit. Having to liquidate early because you are no longer able to run the business or having to sell at point where either the business is struggling or the market is not right, can limit the amount you realize. You only get to sell it once, and your retirement life will be dependent on what you realize. If you have planned for a source of retirement income away from your business, you’ll have more flexibility when it comes time to sell.
Even as you are building your business, it makes sense to think about your personal wealth as a completely different stream of future income. Thinking about diversification across your total asset profile can get you started on a journey to financial independence.
Employees of publicly traded companies are often granted company stock as part of the compensation package. From a portfolio management perspective, holding outsize amounts of stock in the same company that provides income can increase risk. If the business were to become wobbly, not only would the stock decrease in value, but the employee could also potentially find themselves out a job. Employees who are granted stocks often mitigate this risk by selling some of the company stock and reinvesting it in other assets, to diversify growing wealth away from the source of income.
But what about when you own your business? The situation becomes more complex. One strategy that is often followed is to put everything except living expenses back into the business while you are growing it, and then sell part of the business or take on a strategic investor to help you begin to diversify elsewhere. Retirement planning is put on the back burner until the business has grown to a point where the business can be monetized.
But we think there is a more thoughtful approach that works well for many investors.
While it may seem like a good idea, relying solely on your business as your source of wealth can expose you to a lot more volatility than you think. Whether it is saving for a rainy day, or longer-term goals like retirement, if all your wealth is tied up in your business, your business dictates your moves. Creating and regularly adding to a separate investment portfolio diversifies your assets effectively. And if you invest away from areas, you are already exposed to in your business, it can be a powerful tool to help you smooth volatility across both your business and life. For instance, if your business is vulnerable to cyclical sectors, you will want to create an investment portfolio that is defensive against those sectors. Creating a portfolio that is not correlated to your business expenses or to your busy/slack seasons can mean that you will be able to use your investment income to bolster your business if you need to.
There can be significant tax advantages to setting up the right kind of retirement plan for your business and ensuring that you set aside money to invest as close to the maximum as possible every year. While there are of course upfront fees and ongoing costs associated with formal retirement plans, they also allow you to save in a very tax-advantageous manner. Depending on your situation, a 401(k) plan and a cash balance plan are tools you can use to save effectively and look towards a future income stream you can access without having to sell your business. They can also be a great way to attract and retain talented employees.
When you are putting everything back into your business with the idea that you will eventually fund your retirement by selling all or part of it, you are essentially making two bets: That you will be able to sell when you are ready and not before, and that when you are ready the market for your business will be at a good point for an exit. Having to liquidate early because you are no longer able to run the business or having to sell at point where either the business is struggling or the market is not right, can limit the amount you realize. You only get to sell it once, and your retirement life will be dependent on what you realize. If you have planned for a source of retirement income away from your business, you’ll have more flexibility when it comes time to sell.
Even as you are building your business, it makes sense to think about your personal wealth as a completely different stream of future income. Thinking about diversification across your total asset profile can get you started on a journey to financial independence.
Registered Representative of Sanctuary Securities Inc. and Investment Advisor Representative of Sanctuary Advisors, LLC. Securities offered through Sanctuary Securities, Inc., Member FINRA, SIPC. Advisory services offered through Sanctuary Advisors, LLC., an SEC Registered Investment Advisor. Credo Wealth Management is a DBA of Sanctuary Securities, Inc. and Sanctuary Advisors, LLC. This communication has not been reviewed for completeness or accuracy, does not necessarily reflect the views of Sanctuary Securities, Inc. or Sanctuary Advisors, LLC., and is not a recommendation or endorsement of any product, service, or issuer. For additional information, please refer to one of the following consumer websites: www.FINRA.org, www.SIPC.org.
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