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Retirement Planning for Small Business Owners

Deborah Findling, Editor, Finance
Square

This article is only for educational purposes and does not constitute legal, financial, or tax advice. Make sure you consult a professional regarding your business needs.

Thirty-four percent of small business owners do not have a retirement plan for themselves, and 40% aren’t confident they will be able to retire before the age of 65, according to Score.

As a business owner, having a comprehensive plan that accounts for yourself, your employees, and your business — even when your focus is often on the bottom line and maximizing profit margins at the end of the month — can help you set savings milestones toward your goal.

Here are some considerations to help you shape your retirement plans.

Look into an Individual Retirement Account (IRA)

One way to start saving is to open an IRA. An IRA is an account that allows you to save for retirement with tax-free or tax-deferred growth. These options can help you invest in yourself and your business while avoiding taxation until you retire.

  • SEP IRA: A SEP IRA can work for any size business. This will allow you, as the employer, to make contributions on behalf of your employee. The annual limit is $57,000 for 2020, or 25% of an employee’s compensation.
  • SIMPLE IRA: SIMPLE IRAs are available to any small business, however, the employer has mandatory contributions and cannot have any other retirement plan. Employees can contribute no more than $13,500 of their salary in 2020 to a SIMPLE IRA. Employers opting for a SIMPLE IRA are required to match contributions between 1–3% for no more than two out of five years. Employee salary reduction contributions must be deposited within 30 days after the end of the month.
  • Traditional or Roth IRA: A traditional or Roth IRA (or individual 401[k]) could be the best option if you are a sole proprietor. For 2020, your IRA contributions cannot exceed $6,000 ($7,000 if you are over the age of 50) or your taxable compensation if it was less than this dollar limit. You can also contribute to an IRA on your spouse’s behalf.

Think About Participating in a 401(k)

You might already be offering a 401(k) plan to your employees. With a qualified employer-established 401(k), employees can make contributions from their salary on a post-tax and/or pretax basis.

As the business owner, you can also opt in to the plan yourself. In addition to saving for your future, if you’re making contributions into the 401(k) plan for yourself, you can match your own contributions should you choose to match employees’ 401(k) contributions up to a certain percentage.

If you aren’t yet offering a 401(k) plan but would like to, you can follow these steps to choose a 401(k) for your small business.

Consider a Financial Advisor

Sometimes asking for a little help goes a long way. If you’re looking for financial advice, a financial advisor or planner can help you strategize the best way to save, unique to your small business and personal goals.

We spoke to Jack Ablin, Cresset Capital Wealth Management Chief Investment Officer, Partner, and author of Reading Minds and Markets: Minimizing Risk and Maximizing Returns in a Volatile Global Marketplace. He shared a few tips for small business owners planning for retirement.

Jack’s Top Tips for Small Business Owners:

Q: What is a good way for small business owners to prepare for retirement?

A: A great way for small business owners to save for retirement themselves, and create an attractive recruiting and retirement savings vehicle for their employees, is to open a SIMPLE IRA (for small businesses with fewer than 100 employees) or a 401(k) plan. There are IRS limits on the maximum amounts that may be contributed on a pretax basis each year. If these contribution levels are insufficient to fund retirement, there are other plan options to maximize retirement contributions, including a Cash Balance Plan, which allows a small business owner older than age 60 to contribute over $200,000 annually in pretax contributions.

Q: Are there any common mistakes small business owners make that prevent them from retiring?

A: Small business owners often consider their business their most valuable retirement asset. However, many have an unrealistic expectation of the value of their business, or don’t adequately prepare their business for sale. Small business owners should consider hiring a third-party business valuation specialist or investment banker to periodically value their business.

Most businesses are sold based on a multiple of EBITDA (Earnings Before Interest, Taxes, Depreciation, and Amortization), and these multiples can change based on economic cycles and industry trends. If your plan is to sell your business to fund your retirement, it is critical to know what your business is worth, and understand the levers to focus on getting your business ready for sale to attain the maximum value.

Q: What metrics can small business owners keep in mind when saving for retirement?

A: Goals-based investing represents the most current planning strategy. It starts with what you’ll need from your portfolio in monthly, quarterly, or annual spending over your retirement years and derives how much you’ll need today to ensure you’ll have a high likelihood of achieving your goals to “lock in” your retirement lifestyle.

With a wide array of financial services and products available to small business owners, it can be daunting to plan ahead for your business and yourself. Whether your goal is to sell your business in time for retirement or grow your profit margins to save more year after year, these are some first steps to get you started.

Deborah is an editor at Square, where she writes about investment, finance, accounting and other existing and emerging payment methods and technologies.