Small Business Retirement Plans: Tips for Entrepreneurs and Company Owners
That sweet goal of retirement, when you can just stop working and enjoy life. Everybody dreams of it, most people work towards it, and many achieve it. Yet for business owners, there are extra complications. What happens to the business once you are ready to retire? Will you have enough money to retire before you get too old? Can you sell your business and get enough money to retire?
Whether you just started your business and are thinking of the future, or you’ve been running a business for 30 years, we’ve got some tips to help you retire successfully.
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Develop Your Business Exit Strategy
Failing to plan is planning for failure. Eventually, you’ll want to retire, whether it’s in 50 years or five. Having a working plan on how you are going to accomplish this is essential. Plan early on in your career so you can have plenty of time to save.
The first step is to pick an age by which you want to be retired. If you never set a goal age, then it’s quite likely you’ll keep working away and just dream of retiring. Having a goal gives you something to shoot for.
After you have your goal age, then you make plans to achieve it. That can include how you save up money for retirement, how much to invest into your business to improve it for sale, and how quickly you need to get your business independent.
When you finally decide to retire, that means your business will be without it’s owner and leader, in some way or another. You need to make sure that your business can continue to survive without you there. That means up-training managers and whoever will replace you, setting up processes so you are not required to be present for day to day tasks, and making sure your business can be independently operational. This way, you can sell it at the right time or step away from the business easily when it’s time to retire.
Set Retirement Goals Early
Once you’ve chosen your ideal retirement age, you need to figure out how much money you’ll need and how you’ll save it. To start, look at what kind of life you’ll want to live when you reach your retirement age. Are you wanting to own a modest home and have enough money to live comfortably? Maybe you want to travel the world and have extra expenses? Go over your current budget, factor in additional costs you might have during retirement (travel, new home, healthcare) and see how much it will cost to retire.
Then, set goals along the way of your career to meet that end goal. Break up how much money you need to have saved every few years and make it happen. Whether you do it through a traditional 401K or something else, invest in your retirement early and consistently.
Don’t forget that your business is also an asset that can help with retirement. If you choose to sell your successful business, you can get a large chunk of money to help with your retirement. Just don’t rely solely on selling your business to get you through retirement. If your business isn’t worth as much as you hoped, or it fails in later years, you’ll need some other way to survive retirement.
Maybe you don’t want to sell the business, but still want to retire. You can set up your business with a CEO role for the company, while you remain the owner. Doing this means you can continue to get money from the company consistently, as long as it is profitable. The downside is that hiring a CEO means cutting a larger paycheck, which your company may or may not be able to handle. It’s also likely you’ll need to still be involved with the business in some capacity to make sure the CEO is doing their job.
Start Saving for Retirement
Once you’ve made your plan on when and how you’ll retire, start saving. Find which options will work best for you and pursue them. Don’t just rely on selling your business, or money trickling down if you stay the owner but still retire. Businesses fail all the time, unintentionally and often unavoidably.
Put aside money to go towards your retirement. If you have a spouse or partner, coordinate with them for retirement too. You’ll need to account for their costs and income to get the best plan for retirement. Once you know how much money you’ll need and earn, get to work saving.
As a small business owner, things might go wrong. The business might start to go under and it might get tempting to pull out your retirement money early to help it. Before doing this, consider all other options. The longer your money sits before you pull it out, the more money you’ll have for retirement.
Retirement Plans for Small Business Owners and Employees
If your business has grown to have multiple employees and is fairly successful, it’s likely you offer extra benefits including retirement funding. Pick a plan that not just benefits your employees, but you also. That way, you have a good way to consistently save and get help from your own company.
SEP-IRA is a variation of a traditional Individual Retirement Account designed for small business owners. If you have no employees, than a SEP-IRA has little administration fees attached to it, meaning you can contribute to the account easily. If you do have employees you offer it to, there are some fees and taxes that will need to be handled.
For a self employed business owner, SEP-IRAs are a useful tool to keep track of your retirement funds and you can invest them like a normal IRA. If you offer it to employees and the business contributes to it, than those contributions can become deductions on taxes.
401K for Employees and Owners
A 401K is a type of retirement account that requires sponsorship from an employer. Employees then contribute a part of their paycheck towards the account, with the employer matching it to a specific percentage.
If you cut yourself a normal paycheck and are listed as an employee for the business, then you can qualify for a 401K also. Just be aware though that if you give it to yourself, you have to offer the 401K benefits to all of your employees, which for a fledgling company, might be hard.
Through the years, consistently check in with your retirement plans and adapt as necessary. Things like the cost of living, real estate, and healthcare are consistently in flux, meaning your plans will need to change. That might mean you have to work a few extra years, or it could mean an early retirement. Keep saving, work hard at your business, and take the steps necessary so you can eventually leave the company and retire.
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Ben Allen is a freelance content creator and digital marketer who believes in helping small businesses succeed. He spends his free time bragging about his two daughters, eating stuffed crust pizza, and playing video games.
This post was updated February 28, 2019. It was originally published February 22, 2018.