If you’re like many business owners, you aren’t adequately preparing for retirement. According to the Small Business Administration, research shows that business owners are less likely to have retirement accounts than other workers and that those who do have accounts are saving less money on average than other people with comparable earnings. If you’re one of the many business owners who haven’t yet given serious thought to your financial future, it’s time to start.
The first step in retirement planning is to set goals. Think about when you want to exit your business and what you want your life to be like once you do. This is different for each business owner, so it’s key to think about what’s important to you. Then you can think about what steps you will need to take in order to achieve your goals. At minimum, your plan should include:
An exit strategy - You need a plan that clearly outlines how you will get out of your business. It should address your future financial needs, options for getting cash out of the business, tax implications, and a post-business income plan.
A systematic investment program - Putting away money, even a small amount at a time, can steadily add up. For example, by investing $400 a month starting at age 30, it’s possible to accumulate more than $2 million by age 65 (assuming an average rate of return of 6 percent).
A strategy for growth - The more time you have before retirement, the more tolerance for investment risk you have, which is the key to achieving long-term growth. With proper asset allocation and broad diversification, it’s possible to achieve stable, long-term returns. Learn more about these strategies in the article about “Investing” in this section.
A carefully chosen retirement account - Retirement accounts can be an important part of retirement planning, and there are many options available to business owners. Here is an overview:
A SIMPLE IRA is an employer-sponsored plan for business with 100 or less employees.
As the name SIMPLE - Savings Incentive Match Plan for Employees - implies, employers are required to make contributions to employees’ accounts. Employee contributions are optional, pre-tax, and also subject to a yearly limit. Distributions are then taxable.
SEP or Simplified Employee Pension IRAs are specifically meant for self-employed business owners, and those with no or few employees often use them.
Contributions to an SEP IRA may be tax deductible if you qualify and distributions are later taxed. One of the benefits of an SEP IRA is that the annual contribution limits are much higher than a traditional IRA.
Solo 401(k) or one-participant 401(k) plans are for business owners who have no employees. A one-participant 401(k) plan works the same as any other 401(k); however, in this case the business owner acts as both the employer and the employee. Contributions are excluded from taxable income and are taxed when distributed. The contribution limits may also be higher for these plans than other retirement accounts.
Planning for retirement can be complicated for small business owners. Perhaps that’s why so many do not plan for the future. However, by thinking ahead and seeking the help of a financial professional you can take steps to secure your retirement, which will be worth the effort in the long run.