How to Plan Your Retirement as a Small Business Owner

By: First Union


How to Plan Your Retirement as a Small Business Owner

Many small business owners have no intention of ever retiring. However, you should plan ahead just in case you change your mind – voluntarily or otherwise. For example, what happens if you or your spouse become too ill to manage the business?

It’s best to start planning for retirement as early as possible. Also, it’s better to have a retirement account that just keeps growing versus needing one that doesn’t exist.

So, how should you plan for retirement as a small business owner? There are many factors to consider and several plans to choose from.

Create a Life Goals Plan

What are your life goals? What does retirement look like for you? Your vision of where, when, and how you want to retire will impact how you should plan for it.

A few things you should consider include:

  • Where you plan to live and what the cost of living is
  • Predicted sources and amounts of retirement income
  • Increased cost of living expenses and increased health costs
  • When you want to retire and how much you need to save per month to get there

Additionally, you should consider what you want to happen to your business when you retire. Do you want to sell it? Give it to your kids? Have a current employee buy you out?

If you plan on selling your business when you retire, you need to know how much it will be worth.

Determine the Future Value of Your Business

Most business owners tend to overestimate the value of their business. This is especially true when trying to determine the future value of your business.

A few things that could impact your business’s future value include:

  • The economy
  • Your urgency to sell
  • If a buyer will needwant to upgrade the space, tools, appliances, etc.
  • If you have an aging clientele that will need to be replaced

As a result of this uncertainty, you shouldn’t rely on the sale of your business to fully support your retirement. However, planning ahead can help you get the best deal.

Say you have a general idea of when you might want to retire, but no specific date. That allows you to sell at the right time.

If the economy is in a recession, try to stick it out for a few years before selling and retiring. Is the economy booming right now? Sell while you can get the best value for your business.

Starting a Retirement Plan

There are a few main things you need to consider when picking the right retirement plan. Some plans are only available to business owners that don’t have any employees. Different plans forbid or allow employees to contribute to their own accounts.

Do You Have Employees?

If you (and your spouse, if you have one/) have a business with no other employees, you can choose an IRA (individual retirement account/) or a solo 401(k/) plan.

A solo (or self-employed/) 401(k/) plan is only available to companies without employees. That means you can’t use it if you have employees you don’t want to offer retirement plans to.

The solo 401(k/) allows you to put money in your account as both an employee (up to $19,000/) and as an employer (up to 25%/).

Another option for business owners without employees is an IRA. You can use an IRA whether or not you have employees.

A Roth IRA lets you contribute post-tax money and not pay taxes when you take the money out. A traditional IRA lets you contribute pre-tax money, then taxes the money when you take it out.

The one downside to an IRA is that it has a low maximum contribution. If you’re under 50, you can contribute a maximum of $6,000 per year. If you’re over 50, you may contribute up to $7,000 per year.

Thinking about Helping Your Employees Save for Retirement?

If you have employees and want to offer a retirement plan for them (and yourself/), your choices are the simplified employee pension plan (SEP-IRA/) or the Simple IRA.

What are the differences between the two plans?

With a SEP-IRA, you set up plans for everybody and give the same percentage to every employee. That percentage can change every year and may range from 0-25%. Employees do not donate anything to this plan.

The benefits to a SEP-IRA are that you can pay less in lean years and more in good years. Contributions are tax-deductible. You must pay every employee using the same formula.

If you want a plan where your employees can contribute to their retirement, you’ll want to offer a Simple IRA.

A Simple IRA is only available for businesses with fewer than 100 employees and no other retirement plans. There are two main ways to contribute to these retirement accounts:

  • You can contribute a straight 2% all across the board
  • You can match 100% of the employee’s first 3% deferred compensation

The Simple IRA has maximum contribution limits that change every year. As of 2019, employees can only contribute up to $13,000 per year.

How Do You Figure Out Which Retirement Plan is Best?

With so many retirement plan options, it can be hard to decide what’s best for you and your employees. You aren’t required to provide retirement plans to employees, but it makes you an attractive employer. It also opens your options for which retirement plan you choose from.

Need Help to Start Financing a Retirement Plan?

Starting up retirement plans for yourself and your employees can be expensive. Even though you know the investment will pay off in time, you still need the money now. Have you considered taking a business loan to start a retirement plan for yourself and your employees?

First Union Lending can help you start those retirement plans with one of our 9 business loan types. Our lending specialists can assist you in picking the best business loan for your situation.

To speak to one of our experts, call 863-825-5626 or click here. Take a step close to your retirement dreams with a business loan to kick off a retirement account today.

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