Retirement Planning When You Own the Business: What Many Owners Put Off Until It's Too Late

If you own a business, there's a retirement plan running in the back of your head. It probably sounds something like this: I'll sell the business someday and retire on the proceeds.

That's worked out well for some people.

But it's also a bet. A concentrated bet on one asset, in one industry, at one point in time, with one buyer who has to show up. You wouldn't put 100% of your savings into a single stock. But a lot of business owners are effectively doing exactly that.

The Number in Your Head Might Be Too High

Almost every business owner has a number. It's what they think the business is worth. And it's almost always higher than what a formal valuation comes back with.

Not because the owner is wrong about how good the business is. But because buyers look at risk differently than owners do.

Revenue that's tied to the owner personally gets discounted. If you're the one with all the client relationships, a buyer sees that as a problem. Customer concentration, where two or three accounts make up most of the revenue, gets discounted. Undocumented processes, inconsistent financials, and key employees who might leave after a sale all reduce the number.

The gap between what an owner expects and what a buyer will actually pay is one of the most common overlooked areas in business planning. It affects everything downstream, including how much needs to be saved outside the business and how much time is needed to get ready.

Getting a real valuation done three to five years before you plan to exit can help business owners better understand the current value of the business and identify factors that may affect a future sale price. It tells you where you actually stand and what's holding the number down while there's still time to fix it.

Build Savings Outside the Business While the Business Is Running

The same drive that built the business, reinvesting profits, putting everything back in, playing the long game, can work against retirement planning if it means no money ever leaves the business.

A business that generates strong income is actually one of the best vehicles for building retirement savings, because the owner has access to plans that employees don't.

Subject to IRS rules, eligibility requirements and plan design, a business owner may be able to contribute up to $24,500 into a 401(k) plan in 2026 as an employee deferral, plus another $8,000 catch-up contribution if they're 50 or older. Add employer profit sharing and the combined limit can reach $72,000. For owners who want to save more, a cash balance plan layered on top of the 401(k) may allow contributions of $100,000 or more per year depending on age and how the plan is set up. The contributions may be deductible to the business.

The trade-off with cash balance plans is that they require consistent annual contributions and cost something to administer. They tend to work best for owners with steady income who want to accelerate savings. But for someone in their 50s who feels behind on retirement savings, evaluating the potential benefits and obligations of a cash balance plan with qualified tax and financial professionals may be worthwhile.

How You Pay Yourself Matters More Than Most Owners Think

For S-Corp owners, the split between salary and distributions can have real tax consequences.

Salary that's too low keeps payroll taxes down, but it also caps what you can put into a 401(k) or cash balance plan. Contribution limits are tied to how much you pay yourself. If the salary is too small, the retirement plan doesn't work as well as it could.

Salary that's too high means paying more in payroll taxes than necessary. Both you and the business pay on wages, so extra salary above what you actually need creates cost without much benefit.

The right number depends on the situation. It usually involves looking at the trade-off between payroll tax savings and retirement plan capacity. And it's not a one-time decision. When revenue changes or the retirement plan changes, the compensation structure may need to change with it.

Selling Is a Multi-Year Process, Not a Decision

A lot of owners imagine a buyer appearing and a deal closing in a few months. In reality, a well-run business sale typically takes one to three years from decision to closing, and the preparation that makes the business attractive to buyers can take several years before that.

What makes a business sellable is mostly the same thing that makes it more valuable. Revenue that transfers to new ownership. Documented processes. A team that can run things without the owner and clean financials.

Building those things takes time. A business that's well prepared for a sale may be more attractive to potential buyers and may improve the likelihood of a smoother transaction and give the owner more control over the terms.

The tax structure of the sale also deserves attention long before anyone is at the table. The difference between an asset sale and a stock sale can be very large in after-tax terms, although the impact varies based on the facts and circumstances of the transaction. Installment structures, charitable vehicles, and other options all need to be set up in advance. A deal that wasn't planned for taxes from the beginning has fewer choices at the end.

Selling Isn't the Only Way Out

Not every exit is a sale to an outside buyer. Some owners pass the business to a family member. Some sell to a key employee over time. Some wind it down when they're ready to stop.

Each path has different financial and tax trade-offs. A family transfer may involve below-market pricing, gifting, and seller financing. An employee buyout may use the business's own cash flow, which affects how much the owner gets and when.

The right path depends on what the owner actually wants. Maximum money out. Business continuity. Supporting someone who helped build it. Getting clear on that question early, and connecting it to the financial plan, tends to produce better outcomes than deciding at the last minute.

How Does This Tie Into Your Plan?

You know the business. What often gets put off is the plan for what comes next, whether that's selling, stepping back, or making sure retirement isn't entirely riding on one exit. If you'd like to explore how your business fits into your broader retirement and financial planning strategy, our business owner planning page can be a good place to start.

The subject matter in this communication is educational only and provided with the understanding that Principal® is not rendering legal, accounting, investment or tax advice. You should consult with appropriate counsel, financial professionals, and other advisors on all matters pertaining to legal, tax, investment or accounting obligations and requirements.