Laying the Groundwork for a Comfortable Retirement as a Business Owner

As an entrepreneur, planning for retirement can be a daunting task. Unlike employees of large corporations, small business owners lack the cushion of employer-sponsored retirement plans. However, that doesn’t mean you have to face your golden years with trepidation. With a well-thought-out strategy and proactive measures, you can pave the way to a comfortable retirement. This article will walk you through various retirement savings options and key steps you should take in your retirement planning journey.

older business man, older business owner

Retirement Savings Options for Small Business Owners

One of the first steps towards a secure retirement is understanding the different savings options available to you. As a business owner, you have access to several retirement plans that can help you accumulate wealth for your post-work years.

IRA-Based Plans

IRA-based plans are a popular choice for small business owners. These plans fall into two categories: SEP IRA and SIMPLE IRA.

  • SEP IRA: This plan is suitable for self-employed individuals or employers with at least one employee. The contributors and contribution amounts vary depending on several factors. It’s best to consult the Department of Labor’s guidelines to understand the specifics.
  • SIMPLE IRA: This plan caters to self-employed individuals or employers with 100 or fewer employees. As with SEP IRA, the contributors and contribution amounts are different for each plan.

Self-Employed 401(k)

The self-employed 401(k), also known as Solo 401(k), is an excellent option for self-employed business owners with no employees. This plan is funded by the employer, with contributions capped at $58,000 for 2021. However, the owner cannot withdraw from the plan until they reach 59 and a half years old, unless certain qualifying events occur.

Investment-Only Account

An Investment-Only (IO) account is another viable option for self-employed individuals. This type of account allows you to make contributions at your discretion, with the amount determined by the trustee. If you already have a qualified plan and want to further your investments, an IO account can be a smart choice. It’s advisable to consult with a tax advisor for details about the plan, contribution amounts, and tax benefits.

Laying the Foundation for Your Retirement

With the right retirement plan in place, the next step is to lay the groundwork for your retirement journey. Here are some essential steps you should take:

Visualizing Your Retirement Lifestyle

The first step towards a comfortable retirement is to visualize what you want your life to look like during your golden years. Consider factors such as your future living arrangements, estimated costs, potential expenses, and retirement income sources. Creating a comprehensive plan ensures that you address all these critical aspects and avoid any unexpected surprises down the line.

Selecting the Appropriate Retirement Plan

Choosing the right retirement plan is a crucial aspect of retirement planning. As a small business owner, you have access to a variety of retirement plans that employees of larger corporations may not. Each plan offers different flexibility, including contribution amounts, types of qualifying assets, and withdrawal dates. Consulting with a financial advisor can provide clarity on which plan aligns best with your retirement needs.

Crafting a Business Exit Strategy

Developing a solid exit strategy for your business is integral to your retirement planning. The first step is to decide when you want to retire. From there, you can plan out key factors such as who will take over the business, whether you want to sell, and the business’s worth. It’s essential to plan these details in advance to avoid surprises and ensure you’re not left with less than you anticipated.

Evaluating Your Business, Assets, and Investments

Business owners often overestimate the value of their business, making a business valuation is crucial. If you expect a certain amount from selling your business to cover post-retirement expenses and the business sells for less, bridging the gap can be challenging. Similarly, it’s essential to appraise your assets and investments to ensure they can generate the necessary income. If not, you may need to make adjustments.

Avoiding Early Withdrawal from Retirement Savings

A cardinal rule of retirement planning is to refrain from accessing your retirement savings prematurely. Early withdrawal from a retirement account can lead to penalty fees, loss of principal or interest, and potential loss of tax benefits. Therefore, it’s best to avoid drawing from these funds until you retire or qualify for a penalty-free withdrawal.

Developing a Succession Plan

When it comes to planning for retirement as a small business owner, creating a succession plan plays a vital role. A succession plan outlines who will take over your business responsibilities after you retire. According to a survey by Manta, 34% of small business owners do not have a succession plan in place. However, having a well-thought-out succession plan can ensure a smooth transition for both you and your business.

Identifying Potential Successors

The first step in developing a succession plan is to identify potential successors. These could be family members, employees, or even business partners. If your children don’t wish to take over your business, consider hiring a business broker to streamline the process and garner the highest price possible for your business.

Ensuring Smooth Transition

Once you’ve identified potential successors, the next step is to prepare them to take over the business. This process includes training them in various aspects of the business and gradually reducing your involvement in day-to-day operations.

Employee Stock Ownership Plan (ESOP)

Implementing an Employee Stock Ownership Plan (ESOP) is another succession option. An ESOP allows employees to become beneficial owners and offers tax advantages for the selling owner.

Diversifying Your Retirement Savings

While selling your business can fund your retirement, it’s risky to rely solely on the proceeds from the sale. Diversification is key to a robust retirement plan. Opening one or more retirement savings accounts as early as possible can provide a safety net for your retirement.

SEP and SIMPLE IRAs and self-employed 401(k)s are excellent avenues for diversification. Each plan offers different benefits, so it’s important to choose the one that aligns with your financial goals and circumstances.

The Bottom Line

Planning for retirement as a small business owner may seem overwhelming, but with a well-thought-out strategy, you can pave the way to a secure future. Surround yourself with a team of professionals, set concrete goals, and start early. Your future self will thank you.