With an enterprise to operate and many day-to-day commitments, retirement decades down the road could seem like a distant and distracting idea to many business owners. Judith Anderson, senior vice president of Retirement & Personal Wealth Solutions at Bank of America, says that taking charge of your life means planning for your retirement and choosing a well-thought-out plan that's suited for your situation.
It's not about the future but about the “here” and “now”. That's because, in addition to helping you concentrate on your business, a well-planned strategy can lead to improved financial security and, in the short term, may even offer you tax benefits. There is a lot on the plate for small business entrepreneurs when it concerns retirement planning. They need to focus on growing their operations and ensuring they have sufficient cash flow to sustain themselves in the long run. However, they should also consider how they will pay for their retirement expenses and if they will have enough money to cover such expenses in the future.
In case you were wondering, the average revenue range for a small business is between $1 million and $40 million. Therefore, you should factor these numbers into your plans appropriately. But your retirement demands should be the guiding light for all of your plans. Your focus should be on that.
For instance, you may be thinking of retiring soon as the owner of a small firm. If that's the case, this comprehensive guide will get you started on the right track to a more peaceful retirement. So, let’s dig in to explore the seven steps to plan for retirement while owning a small business.
1. Diversify Retirement Investments
One of the most important things you can do for your retirement is to diversify your investments. If you want to protect your investment portfolio value in the event that one area underperforms or loses value, diversification is the way to go. It means spreading your money over several kinds of investments.
But diversity isn't prioritized enough, and that's the problem. Around a quarter of Americans are unsure as to whether or not a diversified portfolio is necessary, says U.S. News and World Report. However, it is important to note that maintaining a diverse portfolio can help minimize the risk of losing your capital in a volatile market.
There are multiple benefits if you implement this approach:
- By diversifying your investments, it assists in decreasing risk by allocating your assets across a variety of securities. This reduces the likelihood of any loss significantly impacting the value of your portfolio.
- It is beneficial for investors as it allows them to spread their investments across different areas, reducing the risk of relying on a single investment. They're extending their resources across multiple options. Put simply, diversification enables investors to potentially transform their wealth from 1 million dollars today to millionaire status in the future.
2. Seek Help from Financial Professionals
It is crucial to consider the decision to seek assistance from a financial advisor. When selecting an advisor, several factors should be taken into consideration:
- What is their level of experience?
- Does he or she know your business?
- How confident are you that they will be able to meet your requirements?
You should get the answers to these valid questions before you make a final choice. Another thing to think about is if your advisor has any fiduciary duties. A fiduciary's legal obligation to look out for your best interests means that they must do so. You may have faith in the expert since they will always prioritize your needs before their own. Further, certifications are often required of fiduciaries, guaranteeing that they possess the required knowledge in their respective fields.
If you are seeking guidance for retirement planning as a small business owner, here's what you can do:
- Reach out to your network of friends and family to see if they can recommend any excellent financial advisors. This could easily connect you with someone who matches the description.
- Take a look at the online reviews of local companies that provide these services. This is going to give an understanding of how reliable others view their employees in the local community where they operate daily during normal working hours.
3. Set Retirement Goals
Setting goals is important before starting a solution. If your business is struggling and you lack a clear vision for its future, it can be challenging to determine when the issue has been resolved. Therefore, small business owners need to establish and manage a retirement plan.
This involves planning for saving and investing, establishing an estate plan, and exploring strategies to minimize tax obligations. In simple terms, it refers to any factor that affects the amount of money that stays after covering monthly expenses, allowing for greater savings or investments.
It is always effective to maintain separate personal and business finances when funding your business. This is to prevent any disruption to the financial flow and avoid draining your savings. It is a common practice for a majority of entrepreneurs with small enterprises to use their personal savings as a source of funding for their businesses.
There is a chance that if your business is facing difficulties, you could be able to deplete your savings. By keeping separate accounts for personal and business finances, you can protect your retirement days from any kind of impact caused by your business.
4. Continuity Plan for Your Business
Making a succession plan is a must for the success of your business. Creating such a plan involves preparing for the future of your business by identifying the individuals who will assume leadership roles, deciding the timeline for their preparation, and outlining the steps they will take to ensure a smooth process. It should contain:
- A list of prospective hires and their strengths and weaknesses.
- An estimation of the time it will take them to become proficient in their new position as owner/manager/leader.
- A plan for training them if needed and keeping yourself in mind. They might require some additional training before you fully release control.
5. Plan for Health Care and Long-Term Care Costs
Healthcare expenses during retirement can be quite overwhelming, especially for people with chronic conditions. Statistics indicate that healthcare spending in the United States reached approximately $4.3 trillion, equivalent to $12,914 per person. Begin by assessing your current health insurance situation, considering the various options available to you:
- Medicare and other health and long-term insurance programs.
- Financial savings plans for healthcare.
- Accounts for health savings (HSA).
- Health reimbursement programs (HRA).
6. Keep Financial Records
Having an accurate evaluation of your company is especially critical when retirement is drawing near. You must maintain up-to-date and precise financial records if you intend to sell your firm at a fair price. Always remember to back up your financial records, review them regularly, and don't forget to include non-monetary revenue and costs like bonuses, sales tax, petty cash, and more.
7. Leverage Retirement Savings Options
Small business owners can save for retirement in a variety of ways, such as through 401(k)s, SEP (Simplified Employee Pension) plans, and individual retirement accounts (IRAs). These plans provide tax advantages and can assist you in saving for retirement while also offering benefits to your employees.
An IRA is a suitable retirement savings option that allows individuals to contribute a certain amount annually based on both their income and age. Your contributions are eligible for tax deductions, and the growth of your earnings stays tax-free until you decide to withdraw them during your retirement years.
A 401(k) plan is a retirement savings plan that lets employees set aside a portion of their salary for their future. Employers also have the option to make contributions to the plan on behalf of their employees. This plan provides several tax benefits and serves as a convenient way to save for retirement, making it an attractive tool for appealing to and keeping employees.
A SEP plan, better known as a simplified employee pension, is another retirement savings plan that provides a simple and straightforward way for small business owners to contribute to their own retirement accounts and those of their employees while also enjoying tax benefits. Those contributions are calculated as a percentage of each employee's salary up to a specified amount.
Final Words
When you're running a small enterprise, a retirement plan might seem to be an unnecessary distraction - an administrative hassle that adds pressure to your company's tight margins. However, a well-chosen retirement plan can provide a small business with a wide range of long-term advantages that should not be unnoticed.
By taking active steps, having a clear understanding of your business's financial situation, exploring suitable retirement account options, and planning your exit strategy, you can create a path toward a retirement that is both comfortable and secure. Don’t forget that consulting with a financial advisor can offer you personalized guidance that is specific to your circumstances.
We hope that this article has provided you with valuable guidance on preparing for retirement as a small business owner. As discussed above, there are numerous points to bear in mind when figuring out the amount you need and the investment options for the situation at hand. The key is to figure out how to maximize profits and minimize losses by striking the correct balance between risk and reward.
