Retirement can loom like a dark cloud for small business owners. Many invest blood, sweat and tears – and every penny – into building their business, but never set aside money for the future.
A huge number of entrepreneurs report that they have no retirement savings at all. 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’re putting all your eggs in one basket. Not just your current lifestyle, but your future,” says Hall. “If something goes wrong, you sacrifice both of us.”
And the list of things that can go wrong is long: Your business can fail. Your health may fail. You may not find a buyer. You may have to sell for less than you need. You may not be able to fully retire.
Instead of betting on everything going right, diversify your nest egg so it will last you well into your later years.
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.
“It’s hard as an entrepreneur and small business owner to think beyond 20 years,” says Mary Bell Carlson, owner of Carlson Consulting LLC. “I often figure out what I need to do today for instant cash and long-term returns.”
But Carlson, a financial advisor and certified financial planner, makes it a point to invest where he can. She and her husband contribute to his employer-provided retirement plan. They each also put money into individual retirement accounts, among other investments.
“My biggest lesson was to start, no matter how small the amount; it’s just important to get started,” she says.
Determine what you can afford, whether it’s 1%, 5% or 10% of your gross income, and commit to it, says Hall. Over a long enough period, even small, regular contributions will compound into something meaningful.
There are a number of retirement plans for small business owners, each with requirements, terms and tax implications.
— Traditional Roth IRA: Individual retirement accounts are easy to open and affordable for almost 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 the 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 up to $61,000 for 2022, although this is split into two parts, each with limits. Like 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 a lot like a traditional IRA, except you can contribute a lot more. Annual contributions are capped at $61,000 in 2022, versus $6,000 for a standard IRA. Another key difference: If you put money into your own SEP IRA, you must contribute an equal employee percentage. This option is best suited 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 offers employee accounts and is easier for small companies to administer than a traditional 401(k ). You must offer a 3% match or a total contribution of 2% to all employees. You can deduct contributions made to your account and those made on behalf of your employees.
Seek professional help
Of course, you can try to decode which pension plan is best for 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 any 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 at SCORE, a national volunteer organization that offers free business mentoring. First, you need to know if your business can be sold and what you can realistically expect to gain from a sale.
An investment banker or business broker can assess your revenue, profit margins, business structure and market to give you an honest appraisal and help you better position your business for a future sale.
“It costs you nothing to get answers to these questions,” says Sherman. “Don’t act blindly; find experts who can help you.”
Kelsey Sheehy is a writer at NerdWallet.