What Retirement Planning Looks Like for Small Business Owners

The pressures on small business owners are numerous. They wear many hats, have fewer resources, and juggle responsibilities that larger businesses can spread across their workforce. For small business owners, retirement planning is another item on the long to-do list and may be deprioritized in favor of more immediate needs. But taking early steps to ensure a comfortable future is essential. Here are some tips small business owners can take for a proactive approach to building retirement savings and preparing for life after work.


Get the worm, start early

The sooner small business owners begin saving, the better. Investments have more time to grow with the added power of compound interest. In simple terms, compound interest is the interest earned on interest. For example, 5% annual interest on $100 equals $105 in the first year. By the end of the second year, the original investment will have grown to $110.25 and 10 years, $162. Regular contributions to retirement accounts are the only surefire way to achieve long-term financial goals. Automatic deposits can help small businesses manage their budget and stay on track with their contributions. [1]


Establish clear, attainable goals

Every successful strategy starts with a solid plan. Goals should be specific, measurable, and realistic. Considerations for small business owners setting retirement goals may include:

  • When to retire
  • How much money is needed to achieve the desired lifestyle, and what are the potential expenses
  • What is the business exit strategy: sell or designate someone to take over 

By outlining objectives, small business owners can build a path toward their future, periodically evaluate their progress, and adjust as needed. 


Learn the options and benefits of small business retirement accounts

Several tax-advantaged retirement account options exist for small business owners. SEP-IRAs, SIMPLE IRAs, and Solo 401(k) plans can all help to minimize the tax burden through tax-deductible contributions and tax-deferred growth.

  • Solo 401(k)—These accounts apply to business owners without employees (Spouses are an exception). Business owners can contribute as both employee and employer to a Solo 401(k), and they reap the same tax advantages as a traditional 401(k).
  • SEP-IRA—Employers fully fund Simplified Employee Pensions (SEP). Easy to open and maintain, employers can contribute on behalf of an employee to a traditional IRA (Individualized Retirement Account). This option shines for companies with just a few employees. 
  • Simple IRA—For businesses with fewer than 100 staff members and no other retirement plan, a simple IRA allows employees and employers to make pre-tax contributions to the account. [2]


Even if the ultimate goal is to sell, small business owners should open at least one retirement savings account, especially those with employees who also need to plan for their future. A financial advisor can help business owners understand the guidelines and choose the best plan for their needs. 


Diversify the portfolio

Many small business owners have too much of their wealth tied up in their business. It is a mistake to fund retirement through the sale of the company. With proper management, savings accounts will grow and afford more options to small business owners and their employees. Retirement accounts perform better with a mix of investments that maximize risk and return, including stocks, bonds, real estate, and other assets. The best way to grow retirement contributions is to diversify savings within one or more accounts.


Plan for unforeseen occurrences

Retirement is a known event that small business owners can prepare for and work toward. Planning for the unplanned will ensure that a business survives in the face of a challenge. It also protects business owners as individuals and safeguards their retirement goals. In addition to adequate retirement planning and savings, business owners should consider an emergency fund and obtain property, health, disability, and liability insurance. Rainy day preparations will bring clear skies in the long run.   


Devise an exit strategy

Small business owners who know what they want to do with their business when they retire will have an easier time planning for it. The first thing to determine is whether to sell or choose a successor. Either way, conducting a business valuation is helpful to confirm how much the business is worth. If the plan is to pass the business to a successor, a lawyer will highlight the legal requirements surrounding it. An employee stock ownership plan (ESOP) is a third possibility where employees can assume business ownership through a retirement plan and trust. ESOPs provide tax benefits to the company and the selling shareholders and retirement advantages for employees. Whatever the exit strategy, business owners should capture it officially in writing to avoid any confusion, should the need for a change happen sooner than expected. [3]


Retirement planning is an ongoing process that requires regular monitoring and adjustment. This is true for individuals and small business owners. Starting early, working toward established goals, and preparing for setbacks will allow small business owners and their employees to ride into the sunset confidently. If you have questions about preparing for retirement as a small business owner, sign up for a complimentary review with SHP Financial today.



[2] https://www.uschamber.com/co/run/finance/employee-retirement-plan-small-business-guide


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