How annuities can help small-business owners achieve retirement security

Owning a small business is rewarding, but it’s also risky because unpredictable income is almost inevitable.

That’s why annuities can be invaluable. Think of them as personal pension plans for small-business owners and entrepreneurs. 

“Many small-business owners spend decades building a business but never build a pension for themselves. Annuities may help solve that problem. These products allow them to convert accumulated assets into guaranteed lifetime income,” said Howard Sharfman, senior managing director at NFP Insurance Solutions.

With a well-structured retirement plan that strategically incorporates annuities, these hardworking individuals can combat fluctuating income and achieve greater peace of mind for themselves and their families.

The value of annuities for small-business owners

Many entrepreneurs choose to reinvest all their earnings back into their business.

“With an annuity, they can create a steady retirement paycheck separate from the company. This product allows money to grow tax-deferred until withdrawals begin,” said Michael Baynes, co-founder and CEO at Clarify Capital. 

Those who deal with unpredictable income that fluctuates based on seasonality, market conditions and other factors that aren’t always in their control may gain a sense of stability that can be a huge advantage later in life.

Baynes, who works with entrepreneurs regularly, explained that most view their businesses as their retirement plans and expect to draw income from them indefinitely. 

“The issue is that business valuations are not always predictable. As a result of that mindset, products like annuities get ignored when they should actually be used,” Baynes added.

Also, most owners aren’t aware that these products can be used for executive compensation or deferred compensation strategies. Through annuities, small business owners may retain key employees who are pivotal to their bottom line.

Presenting annuities to entrepreneurs 

Advisors who work with small-business owners should introduce annuities as a broader planning conversation rather than as a stand-alone product.

From there, keep things simple and position annuities as a financial safety net rather than a complicated investment product. Clearly convey how setting aside a portion of profits each year could create monthly income in retirement. 

Using a simple example could go a long way and help the strategy feel more practical. 

“Let’s say an owner is nearing retirement but still depends heavily on the business for income. Converting some of their profits into an annuity can lock in income even if the business slows down or sells for less than expected,” Baynes explained. 

An annuity may also help business owners who want to step back gradually but still maintain a steady personal cash flow. In these types of situations, the annuity can act as a personal pension.

Typically, fixed indexed annuities and deferred income annuities are the way to go for most entrepreneurs.  

“What’s appealing to business owners about fixed indexed annuities is the ability to offer growth tied to the market while still protecting principal. Deferred income annuities are also useful because they allow owners to lock in income that starts later in retirement,” Baynes said.

Both options turn unpredictable business income into something more stable.

Don’t forget to highlight how annuities might support a business owner in rewarding and retaining top employees. “This use case for annuities is often overlooked yet very effective, “ explained Sharfman.

Anna Baluch is a finance reporter and writer with more than a decade of experience. Contact her at [email protected]