Retirement Planning for Business Owners

Running your own business is often fun and fulfilling, but you have to deal with numerous challenges. One significant challenge that you’ll have handle is planning for your retirement. Many small business owners plan to sell their business or hand it over to a relative and then draw on earnings in their retirement. Although this may be safe for some businesses, the economy is uncertain and it is important to protect yourself from risks that you cannot control. As a business owner, you don’t have an employer to help you set up a working retirement plan and you will need to take action to do this for yourself.

You’re not getting a pension, and it is up to you to make sound decisions and act to secure your financial future. You have to strike a healthy balance between your current lifestyle and your future and take appropriate actions. Fortunately, there are lots of ways you plan for your retirement as a small business owner.

1. Set a Goal and Plan for Your Retirement

The most critical thing in planning for your retirement is visualizing where you want to end up in the future. For instance, do you want to travel around the world and enjoy your retirement life in different countries, or do you just want a modest life? Determine how much you will need for your retirement as early as possible, and start working toward achieving your target amount.

For example, if you are currently 30 years old and you expect to retire at age 65, then you will need at least $2 million for your retirement, assuming that you will live beyond 90 years. Establish your annual income and commit to saving at least 15 percent of it for your retirement.

Defining your retirement target and lifestyle expectations now may help you start from a specific goal and work backward. Once you establish all the components of your preferred retirement life, you can make up your mind to either sell your business or pass it to your next of kin.

2. Start Small and Then Grow

Various saving strategies can favor you even when you are unwilling to set aside a huge chunk of your earnings to go into your retirement savings plan. You can always start small and advance slowly. The four retirements saving plans that are available for small business owners include:

The Solo 401(k): This is considered the best strategy for maximizing your retirement contributions. It is open for business owners with no employees apart from your spouse. The solo 401 (k) is suitable for sole proprietors, partnerships, S corporations and C corporation business owners. The plan provides the greatest possible contribution plan among the available retirement plans since it recognizes you as both the employer and the employee.

Simple 401 (k): This is the alternative for corporations that have less than 100 employees and want to avoid the administrative burden of a typical 401(k). The employer is obligated to contribute a matching contribution of up to 3 percent of each worker’s salary or a non-elective contribution of 2 percent of every employee’s salary. Although the employee must file Form 550 every year, the administrative burden is significantly lower.

SEP IRA: This is an option for sole proprietors who want to save for their retirement with a minimum administrative burden. This plan can cover employees, which allows greater scope for overall business growth. It is easy to set up as there is not a setup fee or annual charges. This plan is 100 percent employer funded, and employees make no contributions.

Simple IRA: The simple IRA plan allows companies with less than 100 employees to set up an IRA for each employee. These workers are then expected to make income deferral contributions to their plan. The employee contributions can be up to 100 percent of their compensation, up to the maximum amount allowed by the IRS.

3. Consider Hiring a Financial Advisor

An experienced financial adviser will help you jump-start your retirement plan and also help you stay focused. If you struggle with  managing your finances, then a financial adviser may be a solution to your problem. Consider hiring a financial adviser with a Certified Financial Planner (CFP) certification. You can use the National Association of Personal Financial Advisors or the Certified Financial Planner Board of Standards databases to find qualified and experienced professionals. There are a number of IAW members with the CFP — search within your network for a trusted advisor!

4. Things to Consider

If you are planning to grow your solo business and hire employees in the future, you may want to consider this when you setup your retirement plans. Retirement account options are more limited when you have employees and you will want to take into consideration the employer contributions required.

Although you can wait until the end of the year and make a lump sum contribution to your retirement accounts, the best practice is to contribute in regular increments  throughout the year. You are less likely to spend money that is safely invested!


Have you established a strong retirement plan? Or are you planning to sell your business and live off the proceeds? We’d love to hear your thoughts on what has worked well and what you struggle with in the comments.


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