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Updated Dec 06, 2023

7 Ways Small Business Owners Can Start Preparing for Retirement

Learn how to plan and save for your retirement as a small business owner.

Cailin Potami
Cailin Potami, Business Strategy Insider and Senior Writer
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This guide was reviewed by a Business News Daily editor to ensure it provides comprehensive and accurate information to aid your buying decision.

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If you’re a small business owner, you likely spend considerable time working to assure your venture’s future, preparing for economic changes, exploring new markets and growing your team. But what about your future? Business owners are entirely responsible for their retirement plans. 

While it may be challenging to pull yourself from the grind of running your company to prepare for your retirement, doing so is crucial. The sooner you begin planning for retirement, the more prepared you and your business will be to face that new chapter when it arrives.

Editor’s note: Looking for an employee retirement plan for your business? Fill out the below questionnaire to have our vendor partners contact you with free information.

How business owners can save for retirement 

It’s never too early to begin saving money for retirement. Small business owners may use different tools from other workers to build their savings, but all retirement strategies start with a thoughtful plan. Consider the following retirement saving strategies for entrepreneurs

1. Set concrete goals for your retirement.

Like any achievable business goal, a retirement savings goal should be challenging but realistic. “Financial goals, like any goals, work best when they are specific, measurable and time-sensitive,” explained Alissa Todd, a financial advisor at The Wealth Consulting Group. “Set … intentional and realistic retirement and financial goals so that you can work toward the retirement lifestyle that you envision.”

Consider the following when setting retirement goals: 

  • Where do you want to retire? To begin planning for retirement in earnest, take time to envision your ideal future. Do you plan to retire close to your family or move in with relatives? Do you want to travel the world? Perhaps you want to enjoy your retirement on a beach with your toes in the sand. 
  • When do you want to retire? You should also have an idea of when you’d like to retire. Do you want to work at your business for as long as possible, or would you prefer to step away early? 

Consider all potential expenses and determine your priorities. While your life, circumstances and preferences may change, you can always adjust your goals accordingly. However, setting specific, concrete goals allows you to build a budget and a plan with attainable milestones. 

Did You Know?Did you know
Many retired Americans expect to continue working to earn money, maintain mental acuity and engage in social interactions.

2. Estimate your business’s value.

If you plan to rely on the sale of your business to fund a portion of your retirement savings, you should have an idea of how much money you can expect to make. 

“Whether a business owner chooses to sell the business, hand it down to family or a colleague, close the business – which often requires selling assets like equipment – or sell out a partnership, this decision will ultimately inform how to prepare for retirement,” explained Jay DesMarteau, chief commercial banking officer at Northwest Bank.

You can determine your business’s value in several ways: 

  • Calculate your business’s earnings before interest, taxes, depreciation and amortization (EBITDA).
  • Use your overall revenue to value the business. 
  • Reference recent sales prices of comparable businesses in your industry. 

Note that a comparative method has some limitations, as the economic circumstances and industry may change drastically before your retirement. When in doubt, consult a professional like a CPA, attorney or financial advisor. 

“Obtain a valuation from an independent company so that you have a realistic expectation of what you can expect to receive from a buyer, and make sure you know whether you want to step away from the business completely or are willing to stay on for a few years in an earn-out arrangement,” Todd advised. “Minimizing taxes is usually a major concern for sellers … so work with a CPA, attorney and financial advisor to ensure that you understand the potential tax implications from your business sale.”

TipTip
Ensure you account for your business's assets and liabilities, as those could affect its ultimate value.

3. Diversify your retirement savings.

Though selling a business is one way to fund retirement, many experts warn about the dangers of relying solely on money from a sale to bankroll your golden years. 

Instead, diversify your retirement planning by opening one or more retirement savings accounts as early as possible. Options include a SEP IRA, SIMPLE IRA, self-employed 401(k) plan or a combination of these plans.

“Weigh your current cash flow situation with your current tax situation and long-term retirement planning goals,” Todd recommended. “All of the retirement plans accomplish something a little bit different, so it’s important to make an educated decision when establishing a plan.”

You may also need to consider your employees. “Certain plans, such as SEP IRA and SIMPLE IRA, require that you make contributions to your employees’ retirement plans each year that you contribute to your own account,” Todd noted. “In contrast, a solo 401(k), commonly referred to as a solo K, can only be set up for business owners and solo entrepreneurs with no employees except for a spouse.”

TipTip
If you sponsor an employee retirement plan, be sure you're also contributing to that, and invest that money to earn a return.

4. Review your retirement plan and adjust as needed.

While you should stick to your savings goals, your retirement plan should be dynamic. Your business could undergo significant changes before you retire, especially if you started planning early. Additionally, shifts in health, family, lifestyle and circumstances may lead you to reevaluate your plans. If your budget is inflexible or relies too much on one source, you might end up in a challenging position. 

Revisit your retirement plan after any major changes in your career, health, business or finances. It’s also essential to conduct regular “check-ups.” If retirement is still on the relatively distant horizon, you may need to assess your plans only once every few years to ensure you’re on track. However, as retirement approaches, evaluating your goals and ensuring you reach the necessary milestones is critical. 

More ways business owners should prepare for retirement

In addition to saving for retirement, business owners should consider the following best practices as they prepare to step away from their company: 

1. Develop a succession plan.

It can be difficult to think about handing over control of your business to someone else. However, planning can help the changeover process go more smoothly. Follow these steps when developing a succession plan.

  1. Get advice on succession plan legalities. First, speak with a lawyer to determine the legal requirements for creating a succession plan. 
  2. Create a shortlist of potential successors. Make a list of people or groups who may want to take over your business. Potential successors could be employees, employee groups, partners, vendors or family members. “In the corporate world, there’s almost always another employee waiting in the wings to take the place of a co-worker who has retired,” explained John Swanciger, head of business development and strategic alliances at Toast. “That’s not usually the case for small business owners, who typically have a difficult time relinquishing control to just anyone.”
  3. Identify a successor. Start approaching potential successors several years before you plan to retire to determine if they’re interested in taking over the business. 

Once you identify a successor, you can develop a plan for gradually relinquishing company ownership. Your plan should include the following:

  • List all the responsibilities your successor must manage, especially all the tasks only you know how to do now. 
  • Map out how much time you’ll need to spend teaching your successor all the critical information they must learn. 
  • Consider if your successor will need help administering the business, and create a support plan. 

Another succession option is implementing an employee stock ownership plan (ESOP). An ESOP is a benefit plan that allows employees to become company owners when the business owner steps down. This plan also offers some tax benefits for the original owner. 

Whatever succession plan you decide on, formalize it in writing to prevent future confusion, especially if you must leave your position suddenly. “While these processes – and eventually handing over the reins to your business – may seem daunting, taking the time to plan ahead will alleviate many of your future headaches,” Swanciger advised.

2. Build your retirement planning support team.

Creating a retirement plan requires extensive knowledge of investments and tax law. The right professionals can advise you every step of the way.

“Surround yourself with a team of professionals in all aspects of your life, especially when it comes to your financial life,” Todd recommended. “That is one of the habits that we consistently see among our most successful clients.”

Include the following professionals on your retirement planning team:

  • Financial advisor: This professional assists with investing, retirement planning, employee benefits, succession planning and business valuation. They can also help with general financial matters like cash flow strategies, debt and risk management.
  • Certified public accountant (CPA): Hiring a CPA minimizes your tax liability and ensures your taxes are done correctly. A CPA can also help you choose the best employee retirement plan for yourself and your organization based on how much you want to contribute in pre- and post-tax dollars.
  • Business attorney: This professional ensures your business entity and its contracts are structured and executed correctly. They also check that your current business format is the best option and advise you on any changes.

“Ideally, all the professionals in your life should work together to ensure that everything each professional is doing is in … alignment with the goals of both the business and business owner,” Todd advised. “Let them do the job that you hired them for so that you can focus your energy on doing the things that make you successful and happy.”

3. Create a plan for stepping away from your business.

The process of stepping away from a business will be different for each owner. Your plan may include the following: 

  • Ensure your business is ready to sell. If your goal is to fund a portion of your retirement from the sale of your business, you must plan early to ensure it’s ready for potential buyers.
  • Scale back your role. You must start decreasing your role in business operations at some point. If you’re selling your business, its new owners should see that the operation doesn’t overly rely on you. If you’re handing over the reins to a trusted successor, it’s time to empower them and trust that they’re ready. 
TipTip
If your successor needs a business loan to finance the purchase, ensure they choose the right business loan option for their needs and meet the necessary criteria to qualify for a loan.

Take retirement one step at a time

If navigating retirement preparation seems overwhelming, work with your financial advisor to create a plan that puts you on track for retirement without compromising your current cash flow or lifestyle. The best thing any small business owner can do to ensure a comfortable retirement is to start planning early.

“Don’t procrastinate,” Todd cautioned. “Even if you feel as though you don’t have the time to sit down and think about your retirement plan, make it a priority. Your future self will thank you.”

Katharine Paljug and Dock Treece contributed to this article. Source interviews were conducted for a previous version of this article.

Cailin Potami
Cailin Potami, Business Strategy Insider and Senior Writer
Cailin Potami is a communications expert who has spent years helping businesses harness the power of data analysis to drive fundraising efforts and marketing campaigns. Potami has hands-on experience obtaining grant funding, developing corporate fundraising initiatives and collaborating with accounting teams on budget planning. She's even dealt with debt resolution. Potatmi has also spent significant time managing marketing efforts, including scripts for media appearances, newsletters and educational material for print, email and social media. Most recently, she has focused on digital marketing with the use of analytics and modeling, also known as intelligence performance marketing.
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