Small business owners can live on hope – hope that future business and success will automatically create a retirement nest egg. But they need a better plan now.
NEW YORK – Retirement can loom like a dark cloud for small business owners. Many invest blood, sweat, and tears — and every penny — in building their business, but never put money aside for the future. A large number of entrepreneurs said they have no retirement savings. For some, selling the business is their only retirement plan.
It’s a risky bet, says Keith Hall, president and CEO of the National Association of the Self-Employed.
“You put all your eggs in one basket. Not just your current lifestyle, but your future,” says Hall. “If something goes wrong, you sacrifice both.”
And the list of things that could go wrong is long: your business could fail. Your health could fail. You may not find a buyer. You may need to sell for less than necessary. You may not be able to retire completely.
Rather than betting on everything going well, diversify your nest egg so it lasts you a long time.
Make retirement planning a priority
Saving for retirement is often the last item in your budget and the first to be cut in favor of other priorities, says Hall. Instead, make it as important as paying your mortgage or running your business.
This won’t come naturally to most entrepreneurs, who are often hyper-focused on immediate needs and tend to plan in three to five year increments.
“As an entrepreneur and small business owner, it’s hard to think about more than 20 years,” says Mary Bell Carlson, owner of Carlson Consulting LLC. “I’m often figuring out what I need to do today to get immediate cash and long-term profitability.”
But Carlson, a financial advisor and certified financial planner, makes it a point to invest where she can. She and her husband contribute to her employer-provided pension plan. They also put money into individual retirement accounts, among other investments.
“My biggest lesson was to start, no matter the amount; it’s just important to start,” she says.
Figure out what you can afford, whether it’s 1%, 5% or 10% of your gross income, and commit to it, Hall says. Over a long enough period, even small regular contributions will turn into something significant.
There are a number of retirement plans for small business owners, each with requirements, stipulations, and tax implications.
– TRADITIONAL, ROTH IRA: Individual Retirement Accounts are easy to open and available to virtually anyone. You can contribute up to $6,000 in 2022 (up to $7,000 if you’re 50 or older). The main difference between traditional and Roth IRAs is whether you want tax savings now or later. Traditional IRAs use pre-tax income, but you pay taxes when the money comes out. With Roths, it’s the opposite.
- SOLO 401(K): Available to business owners without full-time employees (except for a spouse). The contribution limit is $61,000 for 2022, although it is split into two parts, each with limits. Similar to an employer-sponsored 401(k), contributions are pre-tax and withdrawals are taxed as income.
- SEP IRA: A Simplified Employee Pension IRA, or SEP IRA, works much like a traditional IRA, except you can contribute a lot more. Annual contributions are capped at $61,000 in 2022 compared to $6,000 for a standard IRA. Another key difference: if you put money into your own SEP IRA, you must pay an equal percentage to the employees. This option is best for solopreneurs or those with few employees.
- SIMPLE IRA: This option has a lower contribution limit, up to $14,000 in 2022 (for those under 50), but it offers employee accounts and is easier to administer for small businesses than an IRA. Traditional 401(k). You must offer a 3% match or a 2% block contribution to all employees. You can deduct contributions made to your account and contributions made on behalf of your employees.
Get a professional opinion
Of course, you can try to decode which pension plan best suits your business. Or you can work with a Certified Financial Planner or Registered Investment Advisor to determine the best path. Doing the latter can give you confidence in your strategy, help you avoid costly penalties, and ensure you don’t leave money on the table.
If selling is still part of your retirement plan, professional help is essential, says Norm Sherman, a certified mentor with SCORE, a national volunteer organization that offers free business mentoring. First, you need to know if your business is salable and what you can reasonably expect to get out of a sale.
An investment banker or business broker can assess your revenue, profit margins, business structure and market to give you an honest assessment and help you better position your business for future sale.
“It costs you nothing to get these questions answered,” Sherman says. “Do not operate blindly; find experts who can help you.
The content is for educational and informational purposes and does not constitute investment advice.
Copyright 2022 The Associated Press. All rights reserved. This material may not be published, broadcast, rewritten or redistributed without permission. Kelsey Sheehy is a writer at NerdWallet.