Most employers offer a matched 401(k) plan for employees to save for retirement. But when you work for yourself, you have to take responsibility for your own retirement plans.
However, a recent Manta survey of 1,960 small business owners revealed that one-third don't have a retirement plan.
"That's a lot of entrepreneurs whose futures are filled with a great deal of uncertainty right now," said John Swanciger, CEO of Manta.
It can be easy for small business owners to get distracted by the day-to-day financial decisions involved in running a company. But losing sight of your retirement goals can be costly, said Alissa Todd, a financial advisor at The Wealth Consulting Group. "While it is important to focus on your business's success and growth strategy, it is equally important to create a strategy for your own personal financial success."
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1. Set concrete goals.
When you plan for retirement, start by deciding where you want to end up – living a modest life in a little apartment, traveling around the world in your own yacht or somewhere in between. Knowing the result you want to achieve will allow you to start planning.
"Financial goals, like any goals, work best when they are specific, measurable and time-sensitive," said Todd. "Set … intentional and realistic retirement and financial goals so that you can work towards the retirement lifestyle that you envision."
"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," said Jay DesMarteau, head of commercial specialty segments at TD Bank.
For instance, he added, many small businesses are sole proprietorships. If the owner's goal is to grow their business, they'll need to increase the value of their business, add at least three or four employees, and increase revenue.
2. Develop a succession plan.
"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," said Swanciger. "That's not usually the case for small business owners, who typically have a difficult time relinquishing control to just anyone."
According to the Manta survey, 34 percent of small business owners don't have a succession plan in place. But planning for how to leave your company, and knowing who will take over after you leave, is part of planning for both your future and that of your business.
Begin by speaking with a lawyer to figure out the legal requirements for creating a succession plan. Then, meet with the family member or employee you have in mind to take over the business and ensure they're the best person for the position.
Another option is implementing an employee stock ownership plan (ESOP), which allows employees to become beneficial owners and provides tax advantages for the selling owner. Whichever option you choose, you'll want to have everything in writing to prevent any legal problems or confusion for your employees.
"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 said.
3. Build your support team.
The ins and outs of planning for retirement take specialized knowledge, from selecting the best savings option to understanding the tax implications of selling a business. Working with the right professionals can help you plan effectively for every step.
"Surround yourself with a team of professionals in all aspects of your life, especially when it comes to your financial life," said Todd. "That is one of the habits that we consistently see among our most successful clients."
She recommended working with each of the following:
- Financial advisor: This person simplifies your personal and professional financial life by helping with things like investment and retirement planning, employee benefits, succession planning, business valuation, and general financial decisions such as cash flow, debt and risk management.
- Certified public accountant (CPA): This person ensures that your taxes are done properly and minimizes your tax liability.
- Business attorney: This person ensures that your business entity and any 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," said Todd. "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."
4. Plan how you'll step out of your business.
If your ultimate goal is to fund your retirement from the sale of your business, you need to plan early to ensure that it's ready for potential buyers.
"All too often, business owners come to me when they're at the point of being desperate to sell," said Kevin Vandenboss, a broker at Vandenboss Commercial. "They haven't been preparing for the sale of their business, either because they don't know how or because they always thought their kids would take over the business."
To avoid this situation, start approaching potential successors several years before you plan to retire to find out if family members or employees are actually interested in taking over the business. If they're not, you'll need to obtain a valuation of your business and start planning for a sale three to five years before you want to retire.
"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 said. "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."
You'll also need to start decreasing your role in business operations, Vandenboss said. "Small business owners should work toward a goal of being less involved in the day-to-day activities of their business, because businesses that require the owner to work long hours are less attractive to buyers."
5. 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.
"What if your company suffers from a sudden downturn in business, severe property damage or any number of possibilities?" Swanciger asked. "In these cases, it's unlikely that you could find a buyer – putting your retirement savings and livelihood in jeopardy."
Instead, diversify your retirement planning by opening one or more retirement savings accounts as early as possible. These retirement plan options can come in the form of SEP IRAs, SIMPLE IRAs, self-employed 401(k)s or a combination of these plan types.
"Weigh your current cash flow situation with your current tax situation and long-term retirement planning goals," Todd said. "All of the retirement plans accomplish something a little bit different, so it's important to make an educated decision when establishing a plan. For example, in 2019 you can contribute up to $6,000 in a traditional or Roth IRA (and an additional $1,000 if you are over the age of 50). However, in a SEP IRA, you can contribute 20 percent of your earnings as a [sole proprietor] or 25 percent as an S- or C-corp up to $56,000, which is significantly higher."
You may also need to take any employees into account. "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 said. "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."
If navigating retirement savings 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.
Ultimately, the best thing any small business owner can do to ensure a comfortable retirement is to start planning early.
"Don't procrastinate," Todd said. "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."
Additional reporting by Sammi Caramela. Some source interviews were conducted for a previous version of this article.
Disclosure: Securities offered through LPL Financial, Member FINRA/SIPC. Investment advice offered through WCG Wealth Advisors, a registered investment advisor. WCG Wealth Advisors and The Wealth Consulting Group are separate entities from LPL Financial.