A recent survey confirmed that about 34% of small business owners don’t have a savings plan for retirement. In fact, 40% of these business owners aren’t confident about retiring before 65 years. What an uncertain way to face the future!
Unlike employees who wait for their employers to offer the 401(k) plan for retirement, you’re responsible for your retirement plan as an entrepreneur. The daily financial decisions can be overwhelming, and having a grip on your retirement might be challenging.
You need to know some of the retirement strategies that will prompt you to confidently walk into the future. Here are retirement planning strategies to prepare you.
Table of Contents
1. Create Well-Defined Goals
Your retirement goals will determine your financial plan. You need to decide how you want to live in the future. Do you want to live in an apartment near the beach? Traveling in your yacht?
The future you desire will propel you on the best way to plan. Your financial goals should have a realistic time frame. They should also be measurable and specific.
One of the mistakes that people often make is underestimating the living expenses in the future or overestimating future income. It would help to run the actual numbers on retirement models to determine if your plan is realistic.
You might want to reflect on several aspects, such as the possible sources of your retirement income, retirement age, increased expenses as you age, and your lifestyle. The considerations are essential when thinking about retirement strategies for small business owners.
2. Diversify Your Savings
Most entrepreneurs plan to sell their businesses to fund their retirement. Given the economic uncertainties, relying solely on the cash you’ll get from the sale is risky. Anything can happen to your business, such as property damage or even a business downturn.
Your livelihood will be in jeopardy if you don’t get a buyer. Instead of basing your future on such unpredictability, how about diversifying your retirement savings? There are several retirement plan options that you might want to consider.
SIMPLE 401(k)
If your business has less than 100 workers, and you don’t want to bear the standard 401(k) burden, this SIMPLE 401(k) is ideal. This approach allows employees to contribute a part of the compensation. However, you need to have a 2% non-elective contribution for each of your employee’s pay, or a 3% matching contribution of the pay.
For SIMPLE 401(k), you need to file the Form 5500 each year. You’ll be limited from having other retirement plans. However, given the lower administrative burden and ability to borrow against the cash you have in your 401(k) accounts, this option has its incentives.
SIMPLE IRA
SIMPLE IRA enables companies that have less than 100 employees to have an IRA for each worker. In this case, workers can make their salary deferral contributions to reach up to 100% of their compensation. These contributions are often pre-tax, which are usually taken from workers’ paychecks.
The SIMPLE IRA is amongst the best retirement strategies, and the contribution doesn’t lie solely on the employer. What’s more, you stand to get a tax advantage as the contributions made are deductible.
SEP IRA
SEP IRA is a great retirement plan option if your business has no or few workers. This retirement is tax-deductible and almost similar to the traditional IRA. If you have employees, you’ll have to contribute equal percentages of your workers’ wages.
The SEP-IRA approach can be costly if you have a team of workers for your company. For any contribution you make towards your retirement, you also contribute a percentage to your team. Ultimately, it will be quite overwhelming to make significant headway with your own retirement.
Solo 401(k)
If your business doesn’t have any employees, the Solo 401(k) is a retirement strategy that you can consider. The IRS has a contribution limit that you need to know to avoid costly errors. You might want to take the position of an employer and the employee to understand the contribution limits better.
The Solo 401(k) is amongst the retirement tax strategies for high-income earners. It would help to check with the IRS for regular updates on contribution limits. You need to know the minimum and maximum contribution to have a concise plan of your future financial goals.
3. Have a Support Team
As a business owner, it would be absurd to imagine that you’re a jack of all trades. If you don’t have expertise in retirement planning, work with professionals. Retirement planning calls for specialized knowledge as understanding tax matters, and the ideal savings options aren’t easy.
You might want to consider senior living management services for several professional services to prepare you for your retirement. The right professionals will enable you to have a feasible plan. Your network should also consist of several experts to guide you.
Some of the professionals you need to work with include a business attorney, certified public accountant, and a financial advisor. The business attorney will see to it that your business entity, including the structure and contracts, are executed in the right way. The CPA will help with everything related to taxation.
A financial advisor will simplify your professional and personal financial decisions. You also stand to get knowledgeable guidance when choosing the best retirement investment strategies. What’s more, you’ll get unlimited support in succession planning, retirement planning, business valuation, and other vital financial decisions.
For your retirement strategies to be in sync, ensure that these professionals work together. Their activities should be in line with your business goals and personal goals. Regular updates, in this case, will be necessary.
4. Appraise Your Company’s Future Value
Entrepreneurs tend to dedicate significant resources to their businesses, hoping that they will resell them to fund their retirement. If your business is your greatest asset, you need to estimate and predict its value. It’s quite tricky to establish what your business will be worth in the next two or three decades.
Selling your business when you retire can be a viable option. However, you can only make speculations that might have adverse implications in your future financial position. Unfortunately, many business owners overestimate the cost of their business, making them less keen on other financial retirement strategies or plans.
It would help to execute a realistic business valuation. Hire a financial planner to estimate the scalability of your small business in the future. The expert knows some factors to consider, fluctuations, and market projections.
If the projected value doesn’t resonate with your retirement expenses, it’s time to think of additional income sources. You can research more on retirement income strategies to allow you to have a more relaxed senior life.
5. Do You Have a Definite Exit Strategy?
Are you among the 72% of the entrepreneurs without a succession plan? You should be worried. Business owners need to learn how to expect unexpected scenarios.
Having a succession plan is one of the best ways to have an exit strategy in preparation for your retirement. There are several ways to establish an exit strategy, which mostly depends on your financial planning. Some of the common approaches are;
Liquidation
Liquidation refers to closing up shop and selling all the assets. Most sole proprietors find this option as the most ideal. While this approach can be less stressful, you might end up with low returns for your investment.
Passing the Business Over to Your Family
Passing the business to dependents is another common exit strategy made by many small business owners. It ensures that your legacy will still linger on, and you can play the advisory role even after retirement. However, you need to be certain that family members taking over have the right skills to avoid jeopardizing this venture’s profitability.
Sell the Business
Selling the business is arguably one of the most common approaches business owners embrace as an exit strategy. Depending on the path one takes, selling a business can make one get the rightful return on investment. If done right, you might address most of your financial needs upon retirement.
6. Analyze Your Other Investments and Assets
Business owners need to diversify their investments. Despite having a highly profitable business, have other financial plans in place. Get other assets to increase your future retirement income.
Your financial planner can guide you on the most realistic investment. Depending on your age, you might want to consider investing in real estate, treasury bonds, and stocks. Expanding your assets will make you better prepared for retirement.
Business Owners Need to Be Aware of the Best Retirement Strategies
Entrepreneurs hardly consider retirement planning. Most of these small business owners cite financial constraints, while others lack time to research more on the ideal business retirement strategies. Given the future’s unpredictability, planning for it shouldn’t be debatable.
It would be best to think about the right retirement income strategies. You’ll save yourself unimaginable frustrations in your senior years. Start today as the first step is the most important.
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