Help Your Business Owner Clients Reach Retirement

Know the power of retirement plans

By Josh Patrick

Key Takeaways:

  • Your business owner clients are not going to retire solely on the proceeds from the sale of their business.
  • You need to become an expert at different types of retirement plans.
  • Your business owner clients will be interested in how much money they can save, not what’s a fair plan.

Most of your business owner clients have a dream. It’s to build a successful business, sell it for a zillion dollars and ride off into the sunset.

The sad fact is that for the vast majority of business owners this is just a pipe dream. In most cases, business owners will get less than 50 percent of their retirement income from the proceeds of the sale of their business—if they’re fortunate enough to sell it.

If you advise businesses, you probably have spoken with the owner about diversification. Too often I see advisors base a diversification conversation around how unsafe it is for the owner to have all of his or her assets tied up in the business. This conversation almost never gets traction.

The conversation that does work is when I help owners understand that they won’t be able to leave their business if they think the business will provide all of their retirement income. This conversation always gets traction. If your client owns a business and employs fewer than 25 people, it’s very easy to design a retirement program that is almost irresistible for the owner.

It’s all about what the owner can get

The first rule of retirement plan design is understanding that it’s all about what the owners can put in their pockets. Owners are happy to include their employees when it makes economic sense to do so.

Let’s assume your client is in a 40 percent marginal tax bracket, as are most successful small-business owners. If that’s true, your plan only needs to cost less than 40 percent for the employees before it’ll make economic sense to your client.

For example, if your client wants to maximize a 401(k) and profit-sharing plan, he or she will be able to defer $52,000 per year. If the employee cost is less than $43,000, then the employer comes out ahead. The reason? If your client wants to save $52,000 in a taxable account, the tax cost would be $43,000.

When I’ve asked business owners if they’d rather give the government $43,000 or their employees $43,000 while saving $52,000, it’s an easy answer. One hundred percent of the time the business owners will say they would rather give the money to their employees than to the government.

The proper question to ask

Now that you’ve convinced your business owner client that he or she needs to have a qualified retirement plan, you get to help the client figure out how much he or she will save. The proper question here is, “Since you have no limits on how much you can save, how much do you want to put in your plan every year?”

As advisors, we too often decide for our clients how much they can or should save. This is a question our clients should answer. If your client is over 50 years old and has a company that employs fewer than 25 people, it’s easy to design a plan in which the owner can save as much as $210,000 per year in his or her account. I’ve rarely met a business owner who wants—or could afford—to save more than that in a qualified account.

Four power options for business owners

If you’re working with private business owners, you need to know what their retirement plan options are. Here are four plans that I’ve discovered business owners find interesting:

Simplified Employee Pension (SEP) plan—This is the simplest of all plans. It requires an equal contribution for all employees based on their salary. The owner can defer a maximum of $52,000 in this plan. From a tax/employee deferral analysis, it’s hard to make a SEP work with more than ten employees.

A SEP requires that you put the same amount of money away for each employee as a percentage of their salary. This will often cause the amount put away for employees to be larger than the owner’s deferral amount. Once a company reaches ten employees we start to look at 401(k) plans and profit-sharing plans as being more cost-effective for owner retirement savings.

401(k) plan—This plan is best for owners who want to save up to $23,000 per year in their account. You will want to provide a safe-harbor plan for this account. This allows the owner to defer the maximum contribution with no plan testing.

Cross-tested profit sharing/401(k) plan—This plan uses age and salary as a method for putting together contribution amounts. The owner can defer up to $52,000 per year. Using a combination of a maximum 401(k) deferral and profit-sharing plan, the cost for all employees is often less than $43,000, which is the tax breakeven point.

Cash balance—profit-sharing/401(k) plan—Say your owner wants to defer more than $52,000 per year and can reliably do so for at least five years. You can now consider a hybrid plan that combines a cash balance defined benefit plan with a cross-tested profit-sharing plan. The owner will be able to defer about $200,000 per year, with a significantly lower amount for the employees.

Don’t forget the owner’s spouse

In many cases, the spouse of the company’s owner might be on the company’s payroll. If the spouse is over 50 years old, he or she can defer up to $23,000 in the company’s 401(k) plan. This brings a simple deferral to $75,000 for the owner of the company.

If the owner’s spouse is not on the payroll, it’s pretty easy to justify adding the spouse to the plan for the amount that would be needed for the 401(k) deferral.

Find a great partner

You will want a third-party administrator (TPA) to help understand which plan is right for your client. The TPA will do the testing and administration of a plan you install. A good TPA can also help you with plan design by suggesting which plan has the best economic result for the business owner.

Once the plan is installed, you will want to stay in contact with the plan administrator to make sure your client is able to continue deferring the amounts you originally planned.

A financial plan is an important part of the process

Designing retirement plans for business owners is about putting together a strategy that will allow the owners to have the option of leaving their business and not working. A financial plan is a crucial part of the private business planning process.

I often do a rough plan on a legal pad to illustrate the problem the business owner has. I call it the four boxes of financial independence. Once I’ve gotten the attention of the owner we will then move to a formal financial plan.

I want to make sure my client is moving in a direction that will get him or her to financial independence. A simple plan will help both of us understand that we’re making a wise decision.


The time you put into creating a plan for your clients that includes the right retirement plan will pay off. You’ll usually get significant assets to manage, and the owners will find a way to leave their business when they want to, on their own terms.

About the Author

Josh Patrick, CFP®, is a serial entrepreneur and wealth manager who specializes in working with owners of privately held businesses. He spent 20 years in the commercial vending and food service business. From there he entered the wealth management business, where he now works exclusively with owners of private businesses, helping them create value in their business. His goal is to help business-owner clients create a better life. Josh can be found at Stage 2 Planning Partners.