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Navigating Retirement as a Small Business Owner


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According to Forbes, more than one-third of small-business owners lack a retirement savings plan. After spending years growing your business, it’s crucial to have a retirement plan in place to ensure your financial well-being during your golden years. This guide will walk you through the steps to help ensure you don’t reach retirement age without a solid plan for you and your small business.

As a small-business owner, goal setting is nothing new to you. Retirement planning requires the same approach. Begin by envisioning your ideal retirement. Do you plan to stay close to home or explore the world? Your retirement goals and timeline will depend on your desired lifestyle. Ask yourself questions like:

  • What are your predicted sources of income during retirement?
  • Where do you plan to spend your retirement years?
  • What will your monthly expenses be?
  • Have you considered the increased cost of living as you age?
  • Have you factored in potential health-related expenses?
  • What age do you want to retire?
  • How much do you need to have saved to meet this goal?

Retirement Plan Options for Small Business Owners

Unlike traditional employees, self-employed individuals have different retirement plan options. Here are some popular choices:

SEP-IRA:

  • Eligible for the self-employed and business owners with more than one employee.
  • Allows tax-deductible contributions on behalf of both the owner and employees.
  • Offers a range of investment options.
  • As of 2023, contribution limits are the lesser of 25% of the employee’s compensation or $66,000.

SIMPLE IRA:

  • For small-business owners with fewer than 100 employees.
  • Allows employees to contribute to their retirement.
  • Employers typically make a dollar-for-dollar contribution match up to 3% of employee compensation.
  • As of 2023, employees face contribution limits of $15,500, with a catch-up contribution of $3,500 for those over 50.

Self-Employed (or Solo) 401(k):

  • Also known as a solo 401(k), available to small-business owners without employees.
  • Allows contributions as both the employer and employee.
  • Contribution limits as of 2023 are $22,500 as an employee and up to 25% of compensation as an employer, with a total limit of $66,000.

Resist the temptation to dip into your retirement savings prematurely. Early withdrawals may lead to penalties and tax payments. Protect your investments by researching withdrawal timelines and market conditions.

Retirement Plan Options for Small Business Employees

If you have employees, consider offering retirement plans for them as well. Options like the above-mentioned SEP IRA, SIMPLE IRA, or 401(k) can provide benefits to both you and your team.

While selling your business is an option, diversify your retirement savings by opening individual accounts. SEP IRA, SIMPLE IRA, and self-employed 401(k) plans are valuable tools to complement the funds generated from selling your business. Retirement planning is dynamic. Regularly review your retirement plan, especially after significant changes in your business or personal life. Flexibility is crucial to ensure you’re on track to meet your goals.

Surround yourself with professionals, including a financial advisor, CPA, and business attorney. Their expertise will guide you through financial decisions, tax implications, and legal requirements. If you plan to step away from your business, develop a succession plan. Identify potential successors, gradually scale back your role, and formalize the plan in writing. Consider options like an Employee Stock Ownership Plan (ESOP) for a smoother transition.

Planning Your Exit

As retirement approaches, it’s essential to plan your exit from the business. Whether selling or finding someone to take over, align your exit strategy with your retirement timeline and goals. Your business, likely your largest asset, can play a significant role in funding your post-retirement life.

Many small-business owners overestimate the value of their business. Conduct a business valuation (AKA company valuation) to determine its actual worth. This step is crucial if you plan on using your business to fund your retirement. Identify factors that could affect its value and plan accordingly. Evaluate not only the value of your business but also other assets and investments. Consider stocks, bonds, real estate, and assess their potential income to meet your retirement goals. If needed, explore different investment options.

Ensure a smooth transition in the event of unforeseen circumstances by preparing a will. Clearly outline what happens to your business, whether passing it on to a family member, spouse, or child. Seek the assistance of an estate planning attorney to cover all aspects.

Additional Best Practices for Small Business Owners

In addition to retirement planning, here are some best practices to consider as you prepare to step away from your company:

Develop a Succession Plan:

  • Determine the legal requirements for creating a succession plan by consulting with a lawyer.
  • Create a shortlist of potential successors, considering employees, partners, family members, or vendors.
  • Identify and approach potential successors several years before your planned retirement.

Build Your Retirement Planning Support Team:

  • Surround yourself with professionals, including a financial advisor, CPA, and business attorney.
  • Ensure that all professionals work together to align their efforts with both your business and personal goals.

Create a Plan for Stepping Away:

  • Ensure your business is ready for sale if you plan to fund your retirement through the sale.
  • Gradually scale back your role to show that the business can operate smoothly without relying heavily on you.

Preparing for retirement as a small-business owner may seem daunting, but starting early and following a thoughtful plan can make the process smoother. With a combination of a well-structured retirement plan, business valuation, diversified savings, a reliable support team, and additional best practices, you can transition into retirement confidently, ensuring a comfortable and secure future. Remember, the key is to start now, and your future self will thank you.

Christie Waldrop

Posted In: Leadership & Planning, Money

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