Business owners need a retirement plan just like employed people do. It is common to find people who retire in business, and they have not put in place a comprehensive retirement plan. This is detrimental, and it is one of the causes of quick deaths for many retirees. Relying on your business and a social security plan may not be enough. It is important to go beyond that.
Do small business owners face a crisis in retirement?
A survey done by BMO Wealth Management consisting of 400 owners of small businesses revealed that only a small fraction of business owners are ready for retirement. Over 75% of the respondents aged below 64 years and over 18 years have less than $100,000 dedicated to retirement. The people aged from 45 to 64 years appear to be slightly prepared. 32% of these have surpassed the $100,000 for retirement, and a meager 11% have surpassed the $500,000 mark. However, it is encouraging to see that close to 40% of business owners aged 45 to 64 years have IRAs while close to 30% had 401(k) accounts.
What causes many small business owners to shy away from saving for retirement? Most of them think that they will transfer their entire wealth to the family, looking for a friendly exchange or a buyout.
Don’t put all your eggs in one basket
This is a hazardous approach to life for a number of reasons. The risk level is very high since the failure of the business means that your entire wealth is drained away. Once business owners aged below 64 and above 45 were asked if they had any contingency plan if they could not manage to sell their business or if they did not have enough money for retirement. Over 28% indicated that they would push their retirement forward. This is in the hope that they stayed in good health. A report by Employee Benefit Research Institute indicated that close to 56% of early retirees do so due to disability or health issues.
Why don’t entrepreneurs save a lot?
Small business owners have one habit in common. They want to save, yes, but they focus on plowing their earnings back into the business to ensure constant growth. They do not pay themselves huge salaries. If you own a small business, you have trapped a lot of your wealth in your business. If you need to have diverse wealth, your business will have to lose some share, and you will also lose some attachment to your business. If you take money from your business, the growth of your business is hampered.
The other reason why entrepreneurs do not save a lot is that their business is small. If many small businesses were to be sold today, only 14% would be valued above $1 million. A leader of planning in BMO Wealth Management says that entrepreneurs should focus on working on the business other than working in the business. A business owner should consider whether the business can run without them in the event that they retire.
1. Consider your numbers
Estimate the exact amount you will need in retirement. This is best estimated when the business is not at its best. It is in such a state that you can estimate how much you may need to live a decent life if you are not working. Visit such online sites as Vanguard, TIAA, and T. Rowe Price and get free calculators to help you calculate future expenditure.
2. Think of hiring an independent financial advisor to start you off with your retirement plan and assist you to remain focused
Do not just hire anyone out there. Get a qualified person, preferably with a CFP (Certified Financial Designation). You could also visit a number of databases such as Certified Financial Planner Board of Standards and The Garrett Planning Network.
3. Begin a diver retirement plan
You do not need only one plan for your retirement. Ensure that you diversify your plans. This does not mean that you inject a lot of money on each plan. Save affordable amounts. The funds will assist you to trim your taxes and grow your deferred tax so that you may withdraw on retirement. In most cases, the cost of starting a retirement plan and administering it is not much. Visit 401(k) site to enjoy a free database of firms that provide competitive retirement plans to business owners. Consider the main options which include a Solo 401(k), a Simple IRA, a SIMPLE 401(k), and a SEP IRA. Your business could be a partnership, a corporation, a sole proprietorship, or a limited liability company for all the options except SEP IRAs.
A SEP IRA plan is tax deductible, and it works like the ancient IRA. It is nice if you are the sole employee of a company. If you have other employees, ensure that you fund their SEP-IRAs.
A Simple IRA is a plan that works for businesses with exactly or less than 100 employees. The contributions are taken from the paycheck of an employee, and they are pretax, just as with a 401(k). A Solo 401(k) is for every self-employed person who has no employees with the exception of a spouse. You need to save for your spouse in an equal amount as you save for yourself.
A SIMPLE 401(k) can be applied for by businesses that have 100 or fewer employees. The contributors can use the saved retirement money as collateral in case they need a loan somewhere. In the case of financial constraints, a member may make withdrawals and will not be penalized.
4. Make it easy
Procure cheap, diverse mixes when you are investing. You may purchase such funds as emerging stocks that have some ownership in the U.S. bond market, an index fund which puts their entire savings in the U.S. stock market, and one that owns foreign stocks. Another simpler way is to invest in a fund which has a prior determined date of maturity. These ones depend on how old you are. Choose the target fund depending on the year you anticipate to go for retirement. The best ones to consider are Vanguard, T. Rower Price, and Fidelity.
5. Assess the 401(k) that target small businesses
Many 401(k) providers are actively focusing on small businesses. The majority of the small business owners do not agree that they have an adequate number of staffs to prepare a plan for. This is a widespread misconception. Any business owner can have a 401(k) plan.
6. Plan ahead to know who will be the caretaker of the business when you are gone
Think ahead. What will happen to your business once you head into retirement? Will it cease to operate? It is understood that many businesses die once their owners retire. A few, however, are sold. Plan your succession beforehand, and ensure that you understand whether your business will still be profitable in your absence. Do not just go into retirement and leave your business to be sold without your input. Even if it to be sold, play the larger role of finding the best person to ensure its future.
7. Don’t worry if you don’t know everything
Most small business owners are said to be competent in many areas. However, this does not mean that one should be ready with every answer every other time. It is okay not to have an answer to certain challenge in your business. When it comes to retirement plans and saving for retirement, ensure that you have a professional advisor who walks with you. The advisor should be one who knows all your challenges. Do not worry if you do not know retirement options. It is not a mandatory issue to know. There are trained people for that purpose.
Do you own a small business? How are you planning to save for your retirement? Drop us a message and tell us your story!