Retirement planning is often an afterthought for business owners. There are uncertainties considering its futuristic state. Entrepreneurs commonly ask, will I even live to see retirement? Will I enjoy enough success from my business that I can afford not to fund it separately? Aren’t my immediate expenses more of a priority anyway? These deterrents cause many business owners to disregard the importance of retirement. Yet they will likely spend 30 years or more post-work.
Risks Without Retirement Savings
Lack of retirement planning forces business owners to supplement other sources of retirement money, such as Social Security and personal savings. They face the vagaries of fluctuating income whereas employees are generally more assured of a constant and predictable income. Because business owners must juggle their retirement contributions alongside regular expenses, it becomes very easy to neglect retirement savings in the face of more immediate expenses.
When the time comes to retire, the last thing business owners want is to work longer out of financial necessity. Goals and lifestyle suffer as a result. Health is another major consideration. The arrival of serious health problems forces early retirement, further jeopardizing savings. With no dedicated source of retirement funds or income from the business, savings drain quickly.
According to Manta (an online community for business owners), only 34% of business owners plan for retirement. That is an astounding number considering the high risks of having no retirement fund. These 5 steps can help business owners mediate these risks.
1. Run the Numbers
Simply crunching some numbers will give entrepreneurs a good idea of how much it’s going to take to live the retired life. perspective need. Do it early on, too. You can use free online calculators and worksheets to get a sense of how much you will need to save for your retirement. Even though funding it can be a challenge sometimes, just knowing the numbers will help with your planning.
2. Talk to a Financial Advisor
A reputable financial advisor is worth the expense. An advisor should provide an overall perspective on retirement by helping business owners determine exactly how much they will need, expenses, shortfalls and provide a plan to mitigate the shortfalls. Entrepreneurs will benefit from setting up a retirement plan (or two) especially if the plan(s) are authorized by the government. Government-approved retirement plans provide the opportunity for tax cuts. From taking a tax deduction in the present for your contributions to foregoing the deduction now to enjoy tax-free withdrawals upon retirement, these deferrals mean extra money in-pocket. Retirement plans are complex, especially when it comes to the rules for contributing and withdrawing. Without a proper advisor, business owners can be at risk for penalties.
Finding, retaining and work with a financial advisor can be seamless and convenient experience. Here are a few reliable resources for online financial advisors:
- Society of Financial Service Professionals
- National Association of Personal Financial Advisors
- Financial Planning Association
3. Pick up side work if possible
Growing a business is in an entrepreneur’s nature and they are likely to be employed elsewhere to fund a venture. Instead of dumping all of that outside income into the business, entrepreneurs should consider using part of this income to fund a retirement plan.
4. Select a retirement plan
Several plans exist for business owners, including the SEP-IRA, the SIMPLE IRA, the SIMPLE 401k, the solo 401k, and the Keogh. Both a traditional or Roth IRA are viable options for a sole proprietor. Each one has its own rules and they differ according to the amount of contributions. The plans also differ in the cost to set up and run. Plans will fluctuate based on whether or not employees can participate. In addition to selecting the type of plan, business owners will need to select a funding vehicle. Index mutual and exchange-traded funds are among the most popular funding vehicles.
5. Plan the sale or end of your business
In the past owners thought of their businesses as their retirement plans. Partially because retirement plans did not exist for them for a long time. Ideally, the sale of a business will provide the retirement income. But it is still a good idea to talk with a financial advisor to go over your planned retirement lifestyle and anticipate challenges. Considerations should include anticipated lifespan, potential health problems and need for long-term care and whether or not to leave a legacy. Alternatively, owners can opt to close the business. This puts owners at higher risk for lack of retirement funds.
Just as they plan for growth and profit, business owners should plan for their own retirements. Failure to do so can affect not only their comfort and security but their hard-earned business. A good financial advisor and plan will mitigate risk post-work and can take the stress out of retirement planning.