Small business owners are often so involved with the day-to-day operations of their business, many feel they don’t have the time to look down the road and plan for retirement.
And as a result, some entrepreneurs may never be ready to retire. According to a survey by Manta, one-third of business owners don’t have any retirement plan, and 75% of respondents to a BMO Wealth survey said they had “$100,000 or less” saved for retirement.
The retirement plan for some small business owners and entrepreneurs is simply to sell their latest venture when the time comes, finally paying themselves off after years of forgoing a true entrepreneur salary. That’s a risky strategy that doesn’t account for economic recessions, emergencies, and unexpected downturns that can significantly impact your selling price and thus your retirement package.
Rather than put all your eggs in a single basket, start preparing for retirement by exploring your options now. A more diverse retirement plan gives you a better chance at walking away from your business on your terms when the time is right.
Hire a financial advisor
Most small businesses should engage the services of an accountant to help understand the business’s financial situation and plan for the future. A financial planner can help you do the same for your personal finances, especially as they relate to your business.
Look to hire a certified financial planner. Advisors who achieve this kind of certification are monitored throughout their careers by the CFP board to ensure they continue following the CFP code of ethics. CFPs are mandated to put their clients’ financial needs ahead of their own.
The right CFP can help you plan for your future in a way that also works for your now.
Start a small business retirement account
Though your certified financial planner can help you navigate through the following accounts and options, it’s a good idea to become familiar with them on your own as well.
Small business owners can set up a small business-specific retirement account, similar to a traditional 401(k) that larger corporations offer. In fact, some accounts allow for business owners to add employees—and if their business continues to grow, that’s a benefit businesses can offer potential hires in the race for talent.
There are three small business retirement plans in particular that are helpful to small business owners with fewer than 100 employees.
Let’s review your options, all of which are relatively easy to administer and aren’t prohibitively expensive:
Self-Employed 401(k)
Also called a Solo 401(k) or one-participant 401(k), these plans cover just self-employed business owners and their spouses. Therefore, it’s best for sole proprietors, partnerships, and S Corps with no common law employees.
Solo 401(k)s are advantageous because they offer generous contribution limits—you can contribute as both the business owner and employee—with total contributions up to $55,000 (as of 2018) and immediate vesting. There are no setup or maintenance fees.
You will have to file Annual Form 5500 after your plan assets exceed $250,000, and you can’t withdraw funds unless there is a “trigger” event such as termination of the plan.
SEP IRA
Another good plan for solo entrepreneurs as well as business owners with fewer employees, a SEP IRA is easy to set up and maintain, with no maintenance fees. The SEP IRA is also an alternative to formal profit-sharing plans for employees.
Participants can contribute either $55,000 or 25% of their annual compensation for 2018 (whichever is less), and those over 50 can tack on an extra $3,000 per year as a catch-up. Withdrawals can be made at any time, but a penalty may apply if the participant is under 59 ½.
One important facet of the SEP IRA: In order to use this plan, you must also make contributions to any employees’ accounts whenever you make one to your own account. This means that business owners with a large number of employees may want to steer clear.
SIMPLE IRA
A Savings Incentive Match Plans for Employees (SIMPLE) IRA is great for business owners who have fewer than 100 employees. Low-cost options include $25 per participant or a $350 plan fee.
SIMPLE IRAs allow participants to contribute $12,500 a year under the age of 50, with an extra $3,000 a year allowed after 50. Withdrawals can be made at any time, but again, a significant penalty may apply if the participant is under 59 ½.
This is a good starter retirement plan for small owners to offer employees: Employers must match contributions dollar-for-dollar up to 3% of their salary for at least two years in a five year period (for the other three years, employers can match as little as 1%).
Open your own retirement account
You don’t have to open a retirement account that is specific to business owners. You can also use a retirement account like a Roth IRA, which you fund using after-tax dollars and eventually withdraw 100-percent tax-free.
With a Roth IRA, you can make contributions up to $5,500 annually. It requires no plan documents and you can make the account and contribute to it up until the tax filing date the following year.
You can’t offer this account to your employees, but if you’re a solo entrepreneur or otherwise don’t plan to offer these benefits to your workers, a Roth IRA is a fine choice.
Make low-risk and low-cost investments
Here’s another area where having a financial planner comes in handy: Making long-term investments that you can set and forget until the time comes.
Investors such as Warren Buffet and Tony Robbins agree that buying low-cost index funds that invest across entire markets (say, the entire U.S. stock market, or foreign stock markets, or the U.S. bond market) is a good way to reduce risk while investing. Another option is to invest in a target-date fund that adjusts the balance of your fixed-income investments and stocks based on your age and when you expect to retire.
These are investments you can make in conjunction with any other steps you take to secure your retirement. Speak to your financial advisor to understand the best investment options for your financial situation.
Develop an exit strategy
Planning to sell your business when you’re ready to retire is not a bad option in and of itself. The problem comes when business owners don’t have an exit strategy in mind, and instead make split-second decisions based on a declining market or changes in the industry. That’s a good way to signal you’re selling due to distress, and will lose money on the sale.
Your goal as a business owner should be to build your venture to the point that it can operate without you. That way you’ll have the flexibility of deciding that you can sell your business on the open market or to a competitor when the time is right.
Plan your exit strategy for your business now, rather than right before you want to sell. Otherwise, you may fail to sell for the best price, or sacrifice your hard-earned legacy in the process.
