- Small business owners have to save for their own retirement without company benefits or 401(k) matching programs.
- There are many ways small business owners can and should actively prepare for their retirement.
- These five actionable tips can get you started on your road to a financially sound retirement after a career as an entrepreneur.
- This article is for small business owners who want to plan and save for their retirement but aren’t sure how to start.
Most large companies offer employee retirement benefits plans, such as a matched 401(k) plan, so their workers can save for retirement. But when you work for yourself, you have to take responsibility for your own retirement plan.
A Manta survey of nearly 2,000 small business owners revealed that one-third of entrepreneurs don’t have a retirement plan. As a result, many older small business owners are anxious about retirement.
“That’s a lot of entrepreneurs whose futures are filled with a great deal of uncertainty right now,” said John Swanciger, CEO of Manta, in a statement.
It’s easy for small business owners to get distracted by the day-to-day financial decisions involved in running a company, but it is important to keep retirement savings strategies in mind, according to Alissa Todd, 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.”
1. Set concrete goals.
When you plan for retirement, start by deciding where you want to end up – living a modest life in an apartment, traveling around the world in your own yacht, or somewhere in between. Knowing the result you want to achieve allows you to start planning.
“Financial goals, like any goals, work best when they are specific, measurable and time-sensitive,” Todd said. “Set … intentional and realistic retirement and financial goals so that you can work towards the retirement lifestyle that you envision.” [Read related article: How to Set Achievable Business Goals]
“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.
How to get started
Think about your long-term career goals and write them down. Consider everything you hope to accomplish (particularly any goals that have financial ramifications). Do you want to pay off your house by a particular date? Set aside a certain amount of money for kids’ college funds? Purchase a boat or a vacation house? Take a certain number of trips each year?
Whatever your goals are, write them down, and be as specific as possible with regard to amounts, dates and funds needed to accomplish them. You can worry about sorting and prioritizing them later – the important thing to do first is to write them down where you can see them.
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2. Develop a succession plan.
According to the Manta survey, 34% of small business owners don’t have a succession plan in place. But preparing 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.
“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,” Swanciger said. “That’s not usually the case for small business owners, who typically have a difficult time relinquishing control to just anyone.”
Another succession 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, put 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.
How to get started
First, speak with a lawyer to determine the legal requirements for creating a succession plan. Make a list of people or groups who may want to take over your business. It could be an employee, a group of employees, a partner, a vendor or a family member. Consider whether any of those people or groups are prepared to take over your business and whether they’re capable of buying it. Consider any work that may need to be done upfront to prepare your successors to take charge, as well as any controls that will need to be put in place.
3. Build your support team.
Creating a retirement plan for you and your employees requires strong knowledge of investments and tax law. 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,” Todd said. “That is one of the habits that we consistently see among our most successful clients.”
She recommended including each of the following on your planning team.
- Financial advisor: This person assists with investment and retirement planning, employee benefits, succession planning, and business valuation, as well as general financial decisions such as cash flow, debt and risk management.
- Certified public accountant (CPA): Hiring a CPA minimizes your tax liability and ensures that your taxes are done properly. A CPA can also help you choose the right retirement plan based on how much you want to contribute in pre- and post-tax dollars.
- 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,” Todd said. “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.”
How to get started
Interview reputable professionals who may be good advisors to help you build and execute your plan. Make sure they have expertise in all the areas where you need help, whether that’s securities, corporate law or taxes. Ask about their fees and compensation structure. Once you choose your team, make them aware of your goals and schedule regular meetings with one or more of them to check in and track your progress.
Additionally, compare the best accounting software providers if you’re looking to improve how you manage your business’s finances.
4. Plan how you’ll step out of your business.
If your 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, 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 they 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.”
How to get started
List all of the things your successor will need to know how to do once they take over your business, especially all of the things that only you know how to do at the moment. Map out when and how much time you’ll need to spend teaching them those things. Also consider any help they’re likely to need administering the business. If your successor is already an employee at your business, will they need to backfill for their current role?
Consider how much you reasonably expect a buyer will pay for your business. If your successor may need a business loan to finance the purchase, study different types of loans to know which one might work for them. Think about what the buyer will need to qualify for a loan.
Also examine whether you’ll be in a position to finance the purchase yourself by holding a promissory note. While this could be an option that would provide you with some interest income, it’s typically a last resort.
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.
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 2021 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 25% of your earnings up to $58,000, 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.”
How to get started
Make sure your retirement and savings accounts are set up and funded. If you sponsor a retirement plan for your employees, be sure you’re contributing to that as well, and invest that money to earn a return. Consider opening separate savings or investing accounts outside of retirement accounts so you can save money without locking it up or needing to pay taxes on withdrawals later. Shop around for annuities or CDs that you can ladder to provide you with regular income once you’ve quit working.
Take retirement one step at a time.
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.
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.”
Dock Treece and Sammi Caramela contributed to the writing and reporting in this article. Source interviews were conducted for a previous version of this article.