You won’t stay young forever. And with that in mind, you shouldn’t wait until the end of your best years to plan for retirement.
Setting up your retirement plan NOW sets you ahead of savings and opens doors for tax incentives. These incentives are not only beneficial for you, as a small-business owner, but also for your employees (if you have any).
By the end of this article, you’ll learn:
- Why it’s good business to plan for retirement sooner rather than later;
- Action steps to take when retirement planning;
- Retirement savings plans available and when they could be a good fit.
I | Benefits of Small Business Retirement Plans
1. Jumpstart, grow and take control of your savings.
This approach applies to both you and your employees if you have anyone in your employ. Early investment in your financial security is a wise choice. It’s never too early to set aside funds for retirement plans.
Your contributions will grow each year with compounding interest and dividends.
Don’t depend on social security alone.
Social security won’t cover all of your needs. Supplement it with an independent retirement nest egg.
You won’t spend less in your old age. As you get older, your health declines. Medical bills are one of those expenses you can expect to keep touching the ceiling of the average household budget for the foreseeable future.
Add on the fact that when you retire determines your monthly payouts, with late retirement giving you a higher payout, you run into more problems. Your retirement becomes restricted to the rules of others. And if you retire earlier than the age threshold, your lower rate is permanent.
Social Security has its limits. By setting up an independent retirement strategy tailored to your dreams for when you retire, you can do so with greater assurances. Retiring early won’t compromise the rest of your life. And you can do it in whatever style or fashion you please.
2. Benefit from tax break incentives.
Who doesn’t want to keep more of their hard-earned money in their pockets? Retirement plans like SEP IRA, Simple IRA, and Self Employed 401(k) plans offer tax-free growth. Contributions to these small business retirement plans are tax-deductible on your company’s tax return.
Flexible payment plans allow you to choose how you contribute to the fund. You decide if the plan contributions are employer deposits, employee salary deductions, or a combination. To stay on the right side of the law, it’s important to note that each eligible employee should receive the opportunity to participate in the plan.
3. Attract and keep employees.
Employer-sponsored plans or group retirement plans are cheaper than individual plans. Employees factor this into deciding where they work and how long they stay with a company. High employee turnovers are a red flag in the job-hunting market. It dulls your reputation among your business associates, setting you behind.
As a small business, you’re already at a disadvantage in attracting quality employees. Employees race toward large corporations for added security. Almost every large corporation offers a 401(k) with employer-matched contribution plans.
Offer a competitive employee retirement plan. Amp up the close-knit culture of your business and the higher chances of recognition in a smaller pond as a bonus. Spin it however you want, but ensure it’s the truth when they sign their contract.
II | When to Start Planning for Retirement
If you haven’t already, now is the best time. The sooner you explore your retirement plan options and decide on your retirement strategy, the more you can save without financial stress.
Think about it. If you wanted to buy a car in a year, wouldn’t it be easier to save now rather than four months before the deadline?
If you set your budget at $10,000, you’ll save about $833.35 a month for 12 months. However, if you waited until five months before the year deadline, that’s $2000 a month. Good for you if you have that sort of money to fork out in lumps, but if you don’t, the grace period decreases the strain, doesn’t it?
The same principle applies to your retirement fund. No matter how small you start. If, in five years, you win the lottery or your business brings in huge profits, all the better. Up your contribution limits and increase the cash payout for your retirement.
III | How to Plan for Retirement
Besides learning about the options available, which we’ll discuss below, here are some steps you should take as you prepare for retirement.
1. Establish a life goal plan.
Evaluate where you are currently in your personal life and your business. By the time you retire, where do you want to be?
Do you want to settle down in a cozy little cottage somewhere? Travel the world? See the sights and experience the things you didn’t while you were busy building your business?
Crunch the numbers. How much would your desired lifestyle cost? Have you factored in the increased cost of living as you age and the added expense of healthcare?
At what age do you want to retire? How much would you save weekly or monthly to make it happen?
Consider the business
How does your business growth factor into your savings? How can you increase the value of your business if you intend to sell? Is your business plan on solid footing?
Setting realistic, specific, and measurable goals is the first step to success. Your retirement plan deserves nothing less. The end destination determines the route you take to get there and the markers you need to hit as you work toward the retirement lifestyle you desire.
2. Assess the future value of your business.
Determining the future value of your business is not a science. At this moment, your business might be the biggest asset in your portfolio. That could all change with a wink. A sudden downturn in revenues or the economy or even severe damage to your property can leave you in a bind.
Overestimating the value of your business is a critical error. Small business owners who overvalue and rely solely on the sale of their business to funnel cash into their retirement end up short.
Your customers will age with you.
The fact is, as your business ages, your current customer base may age with it. These are your loyal return clients and their circle of friends they refer to your business.
Then you have to consider a decline in their spending. Patronizing your business may be one of those things they cut to tighten their budget at the end of the month.
Assets will depreciate.
The value of what you sell can also depreciate with the development of newer, flashier options on the market.
Reading your future considering all these factors (and more) is best left up to a professional. Hire a certified financial planner with the experience and know-how to conduct a business valuation report.
Your financial planner will assess all the factors, including market trends and fluctuations, and estimate the future salability of your business.
3. Consider your other assets and investments.
Selling your business is one way of funding your retirement. It should not, however, be the only way. So what other assets and investments do you have? Do you have additional properties in your name? Do you have any different investment schemes?
If the answer is no, it’s time to consider a retirement savings account. See the list of options in the next section. If navigating your choices becomes overwhelming, always know professional help is available.
4. Build your support team.
Your “professional help” is your business support team. Successfully navigating the ins and outs of retirement takes specialized knowledge. Ideally, you’d have already started building your team before establishing your business, so this might be a recap. Now is the time if it isn’t, and you haven’t started.
A financial advisor will help you choose the best savings option for you and your business and draft a plan that puts you on track to a happy retirement. They’ll simplify the obstacle course of jargon and clauses that make understanding anything finance-related a pain in the neck for regular people.
What a financial advisor can help you with:
- Investment and retirement planning
- Business valuation
- Risk management
- Succession planning
- Employee benefits
A certified public accountant (CPA) ensures that you stay on top of the tax requirements for your business. The last thing you need is a citation for any tax-related offenses. It won’t bode well for your business, compromising its salability.
Want to keep a bit more of your revenue? Your CPA is your tax advisor. They can help you figure out ways of lowering your taxes with write-offs you may have missed. We all know how important our credit ratings are for business transactions. A CPA can help you improve your score.
A business attorney also ensures you stay on the right side of the law. Lawsuits and claims that arise from breaches in contracts or liabilities can drain your business coffers fast. Though you can’t prevent all misfortunes, limit your exposure as much as you can by hiring a business attorney before disaster strikes.
Remember, your business’s stability, growth, and security play a role in your retirement. Even if the value of it goes down by the time you are ready to retire, you don’t want to hemorrhage your money on the way.
Working with all three of the above will also prepare you for the tax implications of selling your business.
5. Develop an exit strategy.
Would you skydive without a parachute? I think not. So when you think about the end of your working days, consider how the party will end.
- If you want to sell your business, plan with potential buyers in mind. Selling your business shouldn’t be a last-minute rush to the finish.
- If you plan on passing along the business, start by consulting potential successors. Don’t assume they want to take on the responsibilities of running a business.
Each of the above options has considerations you should remember beforehand for a smooth and successful handover, whether to a family member, an employee willing to buy your shares or if you’re selling to a larger company or a different owner.
Also, consider this—Do you have an emergency plan if health issues prompt your retirement to happen sooner than expected?
IV | Retirement Strategies and Options
Choosing a retirement plan should match your current business situation. For starters, anyway. A year or two from now, you can reassess where you are and make necessary changes.
There are three options for retirement plans that you can choose from as a small-business owner:
- Simplified Employee Pension Plan (SEP IRA)
- Savings Incentive Match Plan for Employees (SIMPLE IRA)
- Self-Employed 401(k) Plan
Each plan has its limitations and incentives, so let’s explore them.
Situation #1: You are the only employee in your small business, and your spouse may also work with you.
In the above situation, a Self-Employed 401(k) is your best choice. Designed for self-employed individuals, this plan is tax-deferred and suitable only if you have no employees other than a spouse.
Because you make contributions as both an employer and employee, this plan comes with a high contribution limit. You may contribute up to 25% of eligible compensation from your pre-tax earnings not exceeding $56,000 in 2019. This threshold is a rise from $55,000 in 2018.
When you factor in the absence of maintenance and setup fees, the high savings potential, flexible investment opportunities, and easy administration, the Self-Employed 401(k) is an attractive option for small business owners or sole proprietors.
Self-Employed 401(k) plans change periodically to reflect new legislative changes.
Situation #2: Your business is in the early stages of growth, and you want a retirement plan to add to your employee recruitment incentives.
A SIMPLE IRA Plan is what you’re looking for at this point. It’s set up for businesses with 100 employees or fewer. Employer contributions fund the plan. It’s tax-deductible, along with pre-tax employee contributions.
Employees get the tax benefits of a personal IRA with the added convenience of a 401 (k) plan. Each year, they can decide how much of their salaries they would like to funnel into their accounts. Contribution deposits come through salary deductions taken before federal income tax. This reduces their taxable income while providing them with tax-deferred growth on their retirement savings.
An employer contribution is mandatory but flexible. You can opt to match your employees’ contributions of up to 3% of annual pay, or you can make a non-elective contribution of 2%.
The flexibility of your contribution can take some of the strain off your business coffers. Say one year your business makes a considerable profit, and you can match the 3% with ease, but revenues decline the following year. You can reduce your contribution to 2% to limit financial strain.
As the name suggests, SIMPLE IRAs are easy to set up and maintain, making it a minimal hassle option for your investment in your and your employees’ futures.
Situation #3: Your business is booming, and your employee roster is over 100 and growing as you expand your staffing quota.
If you started with a SIMPLE IRA, then now’s the time to upgrade your retirement offering. A SEP IRA covers you and the employees you hire. You, the employer, are the sole contributor, but contributions are tax-deductible as a business expense with tax-deferred growth potential. You must include all eligible employees in the plan.
A SEP IRA is an investment account. Funds deposited go toward stock investments, bonds, and mutual funds as offered by your provider. Consult your financial advisor on the avenue of investment best suited for you and your financial situation.
SEP allows flexible annual contributions for employers. You don’t have to contribute each year, an advantage in times of low revenue. When you add to the plan, all eligible employees should receive contributions based on the same formula with no discrimination.
Why is there no mention of 401(k)?
In most cases, the three plans noted above are enough for small businesses. Large companies can offer 401(k) because they make more money. They can foot the bill for the higher setup and administration costs, among other incidentals.
Conclusion
‘Now’ is always the best time to start anything important. ‘Later’ comes with added stress and overwhelm you can avoid by taking immediate action.
Do it for yourself.
Start setting up a proper plan for your golden years. Research retirement plan providers. Seek an investment advisor for guidance. There is a range of investment options for eligible, self-employed business owners.
Take advantage while your income and business are stable in the present. You risk overextending yourself if you wait until the last minute.
Do it for your employees.
Your retirement plan offering is a big deal. It can attract better-quality employees and have them stick with your company for longer. Teamwork makes the dream work, and having the right people on your team empowers your business for success.
Be proud of your business and the blood, sweat, and tears you’ve invested. The next step is to prepare for what comes after. The fruits of your labor should leave you happy and fulfilled in your Golden Years when you can rest, knowing you’ve created a life of your design.
