Right now, your business is your life. But someday—when you’re trying to enjoy a leisurely retirement—you won’t want it to be. Are you letting today’s business activities delay planning for tomorrow? If so, you’re not alone. A recent survey found that three-fourths of small business owners ages 18 to 64 have saved less than $100,000 for retirement.1
Fortunately, there are several ways small business owners can prepare for retirement. Decide what works best for you to make sure you’re prepared for whenever you decide to hang up your hat.
Setting a budget: Ask yourself, is your cash flow predictable?
YES: If your business is established and your monthly income is fairly steady, setting a retirement goal and creating a budget that aligns is straightforward. Work with an advisor to consider how much you’ll need in retirement based on a number of factors, such as whether or not you have other sources of income beyond your business, how long you envision working and what type of lifestyle you plan to enjoy in retirement. Then work toward that goal, taking into account that in retirement, you may lose the ability to write off business-related expenses like a home office.
NO: Creating (and following) a budget when you’re on a variable income requires some forethought and discipline. Plan your budget—including a line item for automatic savings—and estimate your monthly income using your lowest earnings figures from years past. Then you’ll feel confident that you’re moving toward your savings goals, even when times are lean. And during more profitable seasons, you can manually save the difference.
Picking a plan: Think about it, do you run your business solo?
YES: If you work by yourself (or with your spouse) and don’t plan on hiring additional help, a Self-Employed (or “Solo”) 401(k) is a viable option to help grow your retirement savings. Maintenance fees are incidental and pre-tax contribution limits are high—up to $54,000 as of 2017.2 Like a traditional 401(k), however, withdrawals before the age of 59-1/2 are subject to penalties and federal income tax.
NO: If you have just a few employees and want to provide a retirement plan, consider a SEP-IRA (Simplified Employee Pension Plan) or Simple IRA (Savings Incentive Match Plan for Employees). Like traditional IRAs, both are funded with pre-tax dollars and have contribution limits. There are some nuances to be aware of (e.g., if you open a SEP-IRA for yourself, you will likely be required to fund ones for your employees1), so consult a professional before signing up for anything new.
NOTE: While a familiar investment type for many, traditional 401(k) plans are best suited for companies with 10 or more employees, given setup fees, administrative costs and other factors. These are a good option for companies that hope to expand and want flexibility in how much they contribute in the form of an employer match.
Getting ahead: Question - are you already saving for retirement?
YES: Awesome news; you’re ahead of the game. But your situation may change, from the size and success of the business, to your health, to what you expect out of your life in retirement. Schedule regular times to revisit your retirement plan to make sure you’re saving enough.
NO: This is a common predicament, especially among business owners. Fortunately, there are ways to catch up. A Simple IRA allows catch-up contributions of up to $3,000 a year for those 50 and older, and those 50 and older with Self-Employed 401(k) plans can contribute an additional $6,000 each year.3, 4 If you’ve opened a traditional or Roth IRA, you can boost your annual contribution by $1,000 once you turn 50.5
Valuation time: Ask yourself this, do you plan to sell your business eventually?
YES: For many business owners who plan on eventually selling, their retirement plan and their business are one and the same. But this approach can have risks, especially if your leadership is the business’s primary marketable value. Long before you put your business up for sale, consider who might be able to run it (and would be willing to pay for the pleasure of doing so).
NO: If you plan to pass the business along to an employee, family member or friend, you will need to determine how much you’ll be able to earn from the business once you’re no longer the leader. Will you still draw a salary? Will you walk off with a windfall when you transfer the reins? Hold onto a partial stake? These questions need clear answers as you consider your retirement savings goals.
No matter what your business is or what stage of ownership you’re in, one thing is certain: Every day is as busy as the last. Reach out for the advice and guidance you need so you can keep running your business with the confidence that you’re also on the right track toward retirement.
1 “5 Retirement Planning Tips For Small Business Owners,” Dec. 8, 2016, Forbes
2 “IRS Announces 2017 Retirement Plans Contributions Limits For 401(k)s And More,” Oct. 27, 2016, Forbes
3 “Retirement Topics - Catch-Up Contributions,” Aug. 17. 2017, IRS
4 “One-Participant 401(k) Plans,” Aug. 27, 2017, IRS
5 “Retirement Topics - IRA Contribution Limits,” Sept. 30, 2017, IRS
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