August 09, 2019

The Ultimate Retirement Plan for Small Business Owners

Most employers offer a 401(k) plan to incentivize eligible employees to save for retirement. Unfortunately, when you work for yourself, you’re responsible for setting up your own retirement plan. Even if you don’t plan on selling your business or stepping down any time soon, it’s a good idea to start planning for retirement now. In this post, we'll explain how you can successfully plan for retirement now, so you’re prepared for the future!

6 Ways That Business Owners Can Start Planning for Retirement:

1. Establish a Savings Plan

It’s not uncommon for small business owners to reinvest all profits into their business, especially in the early stages. Although this is an effective strategy for growing your business, it doesn’t leave you with much cushion if you need cash in the future. A standard rule of thumb is to set aside at least 10 to 15 percent of your income for retirement. However, this number can vary depending on how much you’ve saved already and the amount of money you expect to need when you retire.

2. Set up a Self-Employed Retirement Plan

Sole proprietors have several retirement savings options with similar tax benefits as traditional employer-sponsored retirement plan options.
  • Simplified Employee Pension (SEP): An SEP allows you to contribute as much as 25 percent of your net earnings from self-employment (up to $56,000 in 2019). In most cases, you can open an SEP through your bank or other financial institution.
  • Solo 401(k): In 2019, you can make annual salary deferrals up to $19,000 to a Solo 401(k) on a pre-tax basis. To open one, you’ll need to find a Solo 401(k) provider and complete the necessary paperwork.
  • Savings Incentive Match Plan for Employees (SIMPLE IRA Plan): A SIMPLE IRA Plan can be an appealing option for small business owners with 100 employed individuals or fewer. They’re often less expensive to set up and administer than other retirement savings plans. However, SIMPLE IRAs are unique in that they require you to make contributions on your employees’ behalf — either dollar-for-dollar or on a percentage basis.

3. Contribute to an Individual Retirement Account

In addition to your self-employed retirement plan, you can contribute to an individual retirement account (IRA). Traditional and Roth IRAs have unique characteristics, but both allow you to defer paying taxes on the earnings and growth of your savings until you withdraw it in retirement.  The downside is that if you withdraw your money before age 59 ½, you may have to pay a penalty to the IRS. The traditional IRA employer contribution limit in 2019 is $5,500. Retirement-Plan-In-Text

4. Make Calculated Financial Investments

Albert Einstein famously said, “Compound interest is the eighth wonder of the world. He who understands it, earns it. He who doesn't, pays it.” One of the most reliable ways to grow your retirement savings is to start investing now and benefit from the power of compounding. Although many people are fearful or distrustful of the stock market, investing doesn’t have to be risky or complicated. You can reap just as many benefits by holding low-cost index funds and reinvesting your earnings. In fact, Warren Buffett, one of the most highly respected investors of all time, has instructed the trustee in charge of his estate to invest 90 percent of his money into an S&P 500 Index fund for his wife after he dies.

5. Develop a Clear Exit Strategy

According to a recent Wilmington Trust study, 58 percent of small business owners have no succession plan. No matter what your retirement plans are, it’s a good idea to start thinking about your exit strategy sooner rather than later. Most experts recommend planning for the sale of your business years in advance, as the process almost always takes longer than expected. It might seem like too soon to plan your succession plan if you're still years away from retirement. However, you'll be glad that you have a general plan in place when the time comes.

6. Hire a Financial Advisor to Help

A financial advisor can be helpful in many areas, from managing your personal finances to setting up your retirement plan and taking steps to plan for the eventual sale of your business. If any of these concepts feels intimidating, you might benefit from having a professional walk you through your options. A financial advisor can also be a helpful sounding board for other important business decisions, such as budgeting and expansion plans.

Conclusion: Don’t Wait to Start Your Small Business Retirement Plan

No matter how you plan to spend your golden years, there’s no better time than now to start planning for them. Even if you set aside a little money each month and invest it conservatively, you’re likely to see big returns over time. If you’re unsure where to start, consider working with a financial professional who can point you in the right direction.