6 Retirement Planning Tips for Small Business Owners

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According to SBA.org, there are around 28.9 million small businesses in the U.S. Most of these small business owners do not know how to plan for retirement. The main reason is that they rely heavily on their business’s income, preventing them from thinking and planning ahead. They bank on their current income being their retirement plan. Nevertheless, it is the duty of the small business owner to set aside time for retirement planning.

Retirement Planning Tips

Take your first steps into retirement planning with these six tips.

1. Figure out how much money you’ll need.

That’s your first step. Figure out how much money you’ll need annually as well as for the rest of your life to live a comfortable retirement. This amount will vary from person to person depending on the lifestyle preferred in retirement.

To figure out how much you’ll need in retirement, here are a few lifestyle questions to guide you:

  • Where do you want to live? What’s the cost of living there?
  • What will be your sources of retirement income?
  • What age do you want to retire, and how much do you need to save each month to reach your goal?
  • Have you taken into consideration the increased cost of living as you age and the added healthcare expense?

2. Diversify your investments.

Once you figure out how much you’ll need to live comfortably in retirement, you need to figure out a way to get there. The best way to do that is by seeking a diversified retirement plan. You have five major retirement investment options to choose from, and the best option should depend on the size or nature of your small business.

  • Solo 401(k): The solo 401(k), a one-participant 401(k), is a strong option for independent contractors and sole proprietors. This retirement plan allows you to make contributions to your retirement account as an employer as well as an employee.
  • SEP IRA: SEP IRA plans allow you to accumulate a lot more money than traditional IRAs. The amount of money you can invest in a SEP is based on your earnings. With a SEP, you can contribute up to 25% of your earnings or $57,000 – whichever is less.
  • Roth IRA: In a Roth IRA, the investments grow tax-free, and the withdrawals during retirement are also tax-free. However, you pay taxes when you invest money into the account. Your contributions are not tax-deductible.
  • SIMPLE IRA: A Savings Incentive Match Plan for Employees (SIMPLE) IRA allows both employees and employers to contribute to a traditional IRA. If you are a business with 100 employees or less, you can set up a SIMPLE IRA. You also qualify for a SIMPLE IRA if your business is a sole proprietorship and you are both the employer and the employee.
  • Traditional 401(k) : With a traditional 401(k), you can make employee deferrals, and anyone of age 50 and above can make catch-up contributions. But before you decide to go this route, be sure that your employees understand the benefits of a 401(k), and they are willing to contribute.

3. Don’t sell your business for a retirement strategy.

Most small business owners think that by selling their business, they can set a foundation for their retirement plan. This sounds great in theory, but it can get complicated if the business is family-owned and -operated. Moreover, you may not get the value you are hoping for.

4. Have an exit strategy in place.

It’s important to decide what will happen to your business when you retire.

Will you sell the company? Or will you pass it on to your family? Or will you rather an employee take over the company and buy out your interests?

Do you have an escape plan chalked out in case you are forced to retire sooner than expected due to health issues?
Figuring out your exit strategy can help you in making the right business decisions today.

5. Always approach tax planning strategically.

As a small business owner, you have to consider reducing your personal and business tax liability. Depending on the situation, you may need to make certain strategic business decisions to lower your tax liability. Therefore, it’s a wise decision to work with a financial planner and be proactive about reducing tax after you retire.

6. Hire professional help.

Retirement planning is more complex than it appears. To make smart investments, it is recommended to hire a certified financial planner and a third-party administrator. Qualified and experienced professionals can construct a retirement strategy based on your unique situation and goals.

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Rick Pendykoski is the owner of Self Directed Retirement Plans LLC, a retirement planning firm based in Goodyear, AZ.