Retirement can be daunting for small business owners. Many people invest blood, sweat, tears, and every penny in building a business, but never set aside cash for the future.
Huge numbers of entrepreneurs report not saving at all for retirement. For some, selling the business is the only retirement plan.
It’s a risky bet, says Keith Hall, president and CEO of the National Self-Employed Association.
“You’re putting all your eggs in one basket. It’s not just your current lifestyle, it’s your future,” says Hall. “If something goes wrong, you sacrifice both.”
And the list of things that can go wrong is long and your business can fail. Your health may be compromised. A buyer may not be found. Sometimes you have to sell for less than you need. You may not be able to fully retire.
Instead of betting everything will work out, diversify your nest eggs so they last well into their later years.
Prioritize your retirement plans
Saving for retirement is often the last item in the budget and the first to be cut for other priorities, says Hall. Let’s make it as important as
This doesn’t come naturally to most entrepreneurs. An entrepreneur is very focused on immediate needs, from 3 he tends to make plans every 5 years.
Mary Bell Carlson, owner of Carlson Consulting LLC, said: “I often think about what I need to do today for immediate cash and long-term benefits.”
But Carlson, a financial counselor and certified financial planner, emphasizes investing where you can. She and her husband contribute to retirement plans provided by their employers. They also put money in personal retirement accounts, among other investments.
“My biggest lesson is to start no matter how small. It’s important to start,” she says.
Whether it’s 1%, 5%, or 10% of your gross income, decide if you can afford it and commit to it, says Hall. Over time, even small, regular contributions add up to something meaningful.
There are many retirement plans for small business owners, each with their own requirements, regulations and tax implications.
— Traditional, Ross Ira: A personal retirement account is easy to open and available to virtually anyone. You can donate up to $6,000 in 2022 (up to $7,000 if you’re over 50). The main difference between a traditional IRA and a Roth IRA is whether you want tax savings now or later. A traditional IRA uses your pre-tax income, but pays taxes when the money comes out. The opposite is true for Ross.
— Solo 401(K): Employers without full-time employees (excluding spouses). The 2022 donation cap is up to $61,000, but this is split into his two parts, each with a cap. Similar to an employer-sponsored 401(k), contributions are pre-tax and withdrawals are taxed as income.
— SEP IRAs: A Simplified Employee Pension IRA (SEP IRA) works much like a traditional IRA, but allows you to make more contributions. Annual contributions will be limited to $61,000 in 2022, compared to the standard IRA of $6,000. Another important difference: If you fund your own SEP IRA, you must donate the same percentage to your employees. This option is ideal for sole proprietors and those with fewer employees.
— Simple IRA: This option has a lower contribution limit of up to $14,000 (for those under 50) in 2022, but offers an employee account and is easier to administer than a traditional 401(k) for small businesses. Easy. Every employee must be offered her 3% matching or 2% lump sum contribution. You can deduct contributions to your account and contributions made on behalf of your employees.
Get information from experts
Sure, you can try to decipher which retirement plan is best for your business. Doing the latter will help you feel more confident in your strategy, avoid costly penalties, and avoid leaving money on the table.
If selling is part of your retirement plans, professional help is essential, says Norm Sherman, a certified mentor at SCORE, a national volunteer organization that offers free business mentorship. First, you need to know if your business will sell and how much you can realistically expect to sell.
Investment bankers or business brokers can assess revenue, profit margins, business structure, and markets to provide an honest valuation and help better position your business for future sale.
“It doesn’t cost much to get answers to these questions,” says Sherman. “Don’t operate blindly. Find a professional who can help you.”
The content is intended for educational and informational purposes and does not constitute investment advice. Kelsey Sheehy is a writer for her NerdWallet. Her email: [email protected] Twitter: @kelseylsheehy.