Stepping into the shoes of a business owner brings a level of demand and complexity beyond that of a regular job. Balancing personal finances alongside the web of your business’s financial strategy can be challenging. One of the biggest hurdles for business owners is figuring out how to turn their successful businesses into long-term personal wealth that can support them during retirement. This requires careful planning and thinking ahead; it’s a complex task that involves strategic decision-making.
While chasing their entrepreneurial dreams, many small business owners invest their personal savings into growing their ventures. Surprisingly, a significant portion of business owners, around one-third, lack a proper plan to save for retirement. This raises concerns as retirement approaches, leaving them with an insufficient financial cushion. Let’s explore four key steps that can help accelerate your progress in building retirement savings.
1. Find the Right Plan for You
Unfortunately, you don’t have an employer-sponsored 401(k) account with matching contributions at your fingertips. That doesn’t mean you are out of luck when it comes to building a nest egg. Here are some savings options to consider.
Traditional IRA
A traditional IRA is similar to a 401(k) in that you can contribute pre-tax dollars to an investment account that grows tax-deferred. For 2023, you can contribute up to $6,500, or if you’re over age 50, up to $7,500.
Roth IRA
With a Roth IRA, your contributions are not tax-deductible like traditional IRAs. However, your earnings grow tax-deferred and your withdrawals are tax-exempt (subject to IRS guidelines). Like a traditional IRA, you can contribute up to $6,500, or if you’re over age 50, a total of $7,500. However, one caveat to the Roth is that there are income restrictions. If your income surpasses the cutoff amount for a Roth IRA, you can still contribute to one through a backdoor Roth transaction.
SEP IRA
A SEP IRA, also known as a Simplified Employee Pension, is an IRA similar to a traditional IRA. As an employer of yourself, you can make contributions on your own behalf for your retirement. You can set up a SEP IRA in addition to a solo 401(k) and can contribute either 25% of your self-employed income or $66,000 per year (whichever is the lesser amount).
Solo 401(k)
A solo 401(k) is similar to a traditional 401(k) you’d contribute to as an employee. Funds invested within a solo 401(k) plan grow on a tax-deferred basis. The powerful feature of this plan is that you can contribute in two separate capacities, as an employee and as an employer. Wearing your employee hat, you can defer up to $22,500 (or $30,000 if age 50 or older). As the employer, you can also contribute up to 25% of compensation as defined by the plan. Combined, you can contribute up to $66,000 if you’re over the age of 50.
Adding a Defined Benefits Plan
In order to save more than what your IRA limits you to, you can set up a defined benefit plan. These plans have much higher tax-advantaged contribution limits and can be designed to fit the needs of almost any business. Depending on your age and income, a defined benefit plan allows you to set aside up to hundreds of thousands of dollars to fund your retirement, making it possible to save a lot, even if you have little time.
Ultimately, everyone’s situation is unique, so there’s no one right solution. However, for many people, it makes sense to contribute pre-tax and post-tax dollars to several different accounts. For example, along with a solo 401(k), you may also want to contribute to a Roth or SEP IRA.
2. Banish Debt
The less debt you have when you enter retirement, the better. Whether it’s personal debt in the form of credit cards, car loans, or a mortgage, or business debt in the form of bank loans or equipment purchases, reducing your debt before retiring will lower your monthly expenses and enable your savings to grow and last longer. Review all current debts you face and compare interest rates and balances. This can help you decide which to pay off first.
3. Look Ahead to the Future
Do you have an exit plan? Even if you are just in the beginning stages of your business, it’s imperative to have a plan for the future of your company because it will likely become one of your largest assets.
If you are heavily relying on the sale or succession of your business to take care of your future financial needs, it’s critical that you start thinking about how and when you may want to leave your business and what you can do now to prepare so you receive the highest price possible.
Having a strategic transition plan will make your company more appealing to buyers who want assurance that it will continue to thrive without you. Even if you’re passing the business on to family members, you need a plan in place to ensure that it continues to prosper and all family members are treated equally.
4. Partner With a Professional to Help You Catch Up
Being a business owner brings an extra layer of complexity to your life and finances. Beyond the usual responsibilities of saving for retirement and caring for your family, you must also deal with employee management and tax considerations. Your situation is unique, and partnering with an advisor who understands how to serve business owners can be immensely beneficial.
At Pinnacle Family Advisors, we specialize in catering to the specific needs of small business owners, offering tailored services to address all your financial concerns. Discover how our guidance can help you expedite your retirement catch-up efforts by scheduling an appointment today. Schedule your complimentary introductory meeting by emailing me at [email protected], calling (417) 351-2942, or using my online calendar.
About Michael
Michael Vaughn is a CERTIFIED FINANCIAL PLANNER™ professional and Vice President at Pinnacle Family Advisors (PFA) with 21 years of industry experience. Before joining the PFA family, he served clients with investment management and retirement planning at The Mutual Fund Store for 14 years. Michael graduated from Missouri State University with a bachelor’s degree in business administration and management and earned his CFP® certification in 2004. He also served 20 years in the Missouri National Guard, retiring in 2007 as a Major. He currently volunteers on the board of directors for Good Dads and Fellowship of Christian Athletes. Michael is married to Lori and they have two daughters. To learn more about Michael, connect with him on LinkedIn.