How Small Business Owners Can Start Preparing For Retirement Today
Dan Levenson March 16, 2017
A common approach to retirement for small business owners today is that their business is their retirement. The plan is that they will either sell the business for cash when they are ready to retire or pass it along to a family member for a share of wealth in the future or a buyout. Entrepreneur & Innovation Exchange editor-in-chief David Deeds talks about the risk involved with this approach, “If your business fails, your wealth goes away”.
For today’s small business owner, it’s not that they don’t want to save for retirement, but they often take the earnings and invest right back into the business to help it continue to grow.
In order to be able to think about future retirement, business owners need to be able to step away and work “on the business” instead of “in the business”. The following tips will demonstrate how small business owners can start preparing for retirement:
Run Your Numbers
Know what amount will be needed for you to live when you retire. Understand what your cost of living will be; financial advisors like T. Rowe Price, Fidelity, and more offer free worksheets online that can help you get a grasp on what future expenses may be. It also helps to consider hiring a financial advisor to get you going and help you focus.
Diversified Retirement Plan
Consider a diversified retirement plan. It is not necessary to pour large amounts of money into it to get started, but it can help with your current tax bill and grow tax-deferred until used for retirement. A free directory of firms that offer retirement plans to small business owners can be found at 401khelpcenter.com.
Keep It Simple
Consider a target-date fund that automatically adjusts the balance of your fixed-income (bond) investments and stocks based on your age.
Consider 401k Plans Targeted to Small Business Owners
Many small business owners believe that they can’t offer a 401k plan because of their size. In actuality, any business can offer this no matter how small they are.
This may seem obvious, but this step is often overlooked. In fact, one-quarter of small business owners feel as if they won’t have enough to retire comfortably. Along with business plans, be sure to outline a retirement plan and set goals for how you will achieve it.
While small business owners enjoy many benefits of running their own company such as autonomy and flexibility, many fail to employ successful strategies to set themselves up for success at retirement.
Consider the following strategies that have proven successful for many small business owners:
- Traditional or Roth IRA: Roth IRA’s offer tax-free income when you retire along with the ability to contribute far into the future with no required minimum distributions. If a Roth IRA doesn’t meet your needs, traditional IRA’s offer the benefit of relief on your current tax bill by allowing deductions for contributions that are made. The traditional IRA is best for those who are currently in a high tax bracket but expect that to change by the time of retirement.
- Solo 401k: If you are self-employed and have a very small business, you may benefit from a solo 401k. This flexible plan allows you to contribute as an employer and employee. The employer contributions are tax-deductible.
- Have an exit strategy in place: This will ensure you have a way out at retirement time and put you in a position to be able to sell your business if desired.
While retirement may seem a ways off, it’s important not to neglect properly planning for the future today. We understand the challenges that small business owners face and offer a full line of insurance options. We’d love to discuss how we can help your business today!