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5 Simple Retirement Tips for Small Business Owners

Written by prositesfinancialSep 17 • 3 minute read

Most small business owners know that they should be saving something for retirement but don’t have a plan. It isn’t that they don’t want to save for retirement, it’s just that the tantalizing appeal of re-investing profits back into the business to help it grow faster is too tempting and they end up re-investing for today rather than saving for tomorrow.

If you are a small business owner, your wealth is most likely tied up in your business. It is great that you have wealth, but to have all your eggs in one basket like that is never a wise idea, as you most likely are well aware. It is important to spread out your wealth in a properly diversified fashion so you can retire without having your whole future hinged upon the success of your business. Here are some ideas that may encourage you to start now, so you have something for later.

1. Do the Math

The first step in any retirement plan is to run the numbers and calculate exactly how much you will need in savings and investments to live comfortably at your desired standard of living in retirement. This should ideally be calculated without the need for any income from your business. This step alone could end up serving as a well-needed wake-up call, because realizing how much money you will need may motivate you to begin saving that money.

2. Hire a Professional  

If you needed brain surgery, would you even think of doing it yourself? Because your future retirement depends upon having a plan that works and serves you well, it is smart to enlist the help of someone who has the right knowledge and experience. You could go with someone who has a Certified Financial Planner (CFP) designation, or who is a Registered Investment Advisor (RIA). There are many professional databases you can search to find someone in your area, or you can ask a friend for a referral.

3. Open a Diversified Retirement Plan

There are many options out there, so it is important to evaluate them all or talk to someone who has. The most important thing is to open an account and begin making contributions. As a small business owner, focus on plans that cater to people in your classification.

There are four major types of retirement plans: SEP-IRA, SIMPLE IRA, Solo 401(k), and SIMPLE 401(k). For all of these except SEP-IRA, you can be a sole proprietorship, an LLC, a partnership, or a corporation. The specific annual contribution amounts for each change regularly, so you should check with the IRS for current limitations.

  • A SEP-IRA is a tax-deductible retirement plan similar to a traditional IRA. It is ideal for small businesses where the owner is the only employee. If you have employees, you will need to create SEP-IRAs for them as well.
  • A SIMPLE IRA is a retirement plan for businesses with less than 100 employees. Any contributions made are pre-tax and can be taken from paychecks, similar to the way a 401(k) works.
  • A Solo 401(k) is a plan for self-employed individuals who do not have any employees, with the one possible exception of a spouse.
  • A SIMPLE 401(k) plan is for businesses with 100 or fewer employees. With this type of plan, you and your employees can borrow against the money in the plan and make withdrawals without penalties, if they are due to financial hardship.

4. Create a Portfolio

Once you have selected a plan (ideally with help of a qualified professional), go for a mix of low-cost index funds. These can be ETFs (Exchange Traded Funds) or Mutual Funds. These funds track indices that in turn track with various segments of the financial markets. You could, for example, use a fund that tracks the entire S&P 500 index, or one that tracks the U.S. bond market. You could use one that tracks emerging companies or one that tracks the technology or healthcare sectors. These funds allow you to diversify your portfolio rapidly without having to buy hundreds of individual stocks.

5. Look Plans for Small Business Owners

There are several different 401(k) providers offering plans that have been created specifically for small business owners. Capital One, for example, has their Spark 401(k) plan which provides a series of low-cost all-ETF 401(k) plans for businesses that have less than 100 employees. They also provide access to retirement planning experts with their plans as well. Keep in mind this is just one of many different options available to you.  

Now, you have seen that there are some options available to you in terms of different types of retirement plans, and different types of diversified investments that can help you retire at your target retirement date in comfort and with confidence.

If you have any retirement planning tips of your own that you think could prove helpful to other small business owners who are concerned about planning for their retirements, feel free to share those tips here in the comments below.

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