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Planning for retirement as a small business owner

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Planning for retirement as a small business owner

Updated: November 19th, 2020

Planning for retirement as a small business owner

Small business owners aren’t just responsible for building budgets, drafting business plans, and overseeing the day-to-day operations of a company — they’re also usually in charge of funding their own retirement. And while the idea of planning for retirement while you’re trying to run a company may seem intimidating (or even downright impossible), it can also be exciting and gratifying to take control of your financial future.

Whether you’re decades along in your business or just beginning, here are four practical tips to help you prepare for retirement.

1. Crunch the numbers

To begin, you’ll want to determine roughly how much money you’ll need to save and how many years you have to do it. Start by opening up an Excel spreadsheet and recording your various expenses, including health insurance, mortgage payments, car payments, and other bills. Once you have an idea of your fixed expenses, dig a little deeper and think about the lifestyle you’d like to have in retirement. How do you envision spending your time and money?

Many financial advisors recommend saving enough money to replace 70-90% of your pre-retirement annual income per year. NerdWallet has a helpful retirement calculator where you can fill in your salary, retirement age, and current savings amount to figure out exactly how much money you should be saving each year.

2. Plan an exit strategy

No matter how young your business is, it’s never too early to consider the possibility of selling it one day. After all, your company may become one of your biggest assets, and liquidating it could be a good option to help fund your retirement. That’s why it’s smart to start thinking about if — and how — your business could run without your involvement. What steps do you need to take to set your business up for long-term success? That might entail promoting one of your best employees to a managerial role, reevaluating your business plan, or redistributing your workload.

Keep in mind that planning your exit strategy is just one of many ways to prepare for retirement. The financial market can change swiftly, so it’s best not to bank on the prospect of selling the company as your sole means of retirement funding.

3. Find the right plan for your business

Before you choose a retirement plan, it’s important to consider whom you want to cover in the plan (just yourself, or your spouse and employees, too?) as well as who will make contributions to the plan (you, or you and your employees?). Taking these things into account, here are four of the most common and cost-effective retirement plans for small business owners. Keep in mind, though: it’s always a good idea to consult a CPA or other tax professional before you commit to a plan.

  1. A SEP-IRA is a tax-deductible retirement plan that allows you to contribute any amount up to $54,000 in 2017. Keep in mind that as a small business owner, you’re required to contribute the same amount to your employees’ funds as you do to your own.
  2. A SIMPLE IRA is a retirement plan designed for businesses that have fewer than 100 employees. Similar to a traditional 401(k), employee contributions are made pre-tax and employer contributions are tax-deductible.
  3. A Solo 401(k), sometimes called a Self-Employed 401(k), is ideal for self-employed business owners who don’t have employees. You can contribute up to 25% of your annual compensation pre-tax, as long as it doesn’t exceed $54,000 in 2017.
  4. A SIMPLE 401(k) is similar to a SIMPLE IRA — it’s designed for small businesses with fewer than 100 employees, and both employees and employers can make contributions. The big difference with this retirement plan is that you and your employees can take out loans from your respective 401(k) balances in case of financial hardship.

4. Develop a game plan for boosting savings

As you become more stable in your business, consider challenging yourself to see how much money you can put toward retirement. Review your finances at the end of each quarter to determine which areas you can scale back on — in both your business and personal life — then create a monetary goal to work toward over the next several years. To achieve your goal, consider gradually increasing your savings by 1-2% a year, giving yourself a retirement fund “bonus” every quarter, or taking advantage of particularly profitable years to sock away some extra money.


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