How to Prepare for Retirement as a Small Business Owner

How to prepare for retirement as a small business owner. Small business owners have a unique drive and ingenuity that helps propel their business forward. While running a successful business is a blessing, it can also lead to unique financial needs, including how to best plan for retirement. According to one survey, over a third of entrepreneurs don't have a retirement savings plan. But it's never too early or too late to start considering how you'll leave your business, and how you'll fund the retirement you've always wanted. If you're a small business owner in the St. Louis area, call Correct Capital Wealth Management at 314-930-4015 or contact us online to discuss your retirement planning today.

How Is Retirement Planning Different for Small Business Owners?

Most people who are interested in retirement planning, whether they're employers or employees, are aware of the basics: start saving early, set aside a certain percentage of your earnings every month, invest, diversify, etc... While those basics remain true for anyone saving and investing, retirement planning when you owe a small business comes with certain unique considerations:

  • Limited access to retirement benefits — Small business owners generally don't have access to employer-sponsored retirement plans like 401(k)s or pensions. This means that they will have to set up their own retirement plans or explore alternative options like a Simplified Employee Pension (SEP) plan or a Solo 401(k).
  • Volatility of income — While most workers have a steady hourly rate or salary, small business owners often have irregular and unpredictable incomes, which can make retirement planning more challenging. It's important to create a realistic budget that accounts for these fluctuations and to plan for contingencies.
  • Responsibility for plan administration — Small business owners who set up their own retirement plans will be responsible for administering and managing the plan. This can be time-consuming and may require specialized knowledge and expertise.
  • Tax considerations — Small business owners may have different tax considerations to take into account when planning for retirement. For example, they may be eligible for tax deductions or credits for contributions made to a retirement plan, or they may need to plan for higher taxes in retirement due to their ownership of a business.

At Correct Capital, our financial advisors help our clients overcome unique financial needs to plan for their retirement every day, whether they work a 9 to 5 or own their business.

How to Plan For Retirement As a Small Business Owner

Set Clear Life Goals

This first option is the same for anyone who's planning their retirement. What do you want your life to look like in 3 years or 15 years from now? What about 10 years into your retirement? Your saving strategy and how much you need to save will be different if you plan on spending your golden years touring the vineyards of Bordeaux, or if you're more content watching every Cardinals and Blues game you can from your living room. While plans can always change, it's important to have a concrete idea of:

  • How old you want to be when you retire
  • Where you want to live when you retire
  • Where your retirement income will come from

You'll also need to consider what plans you have for your business. Do you want to own an ever-expanding franchise, or have a small but stable business that lets you do what you're passionate about? Determining how much money you need pre-retirement goes a long way in helping you plan for after you retire. If you want to make a large investment in your company in 10 years, that will affect how you invest your savings in the short term.

Choose the Right Retirement Plan

While Uncle Sam offers Americans a reliable retirement income stream, Social Security alone is not sufficient. Some small business owners may look to sell their business as a way to fund their retirement, but relying on speculation to calculate the return on a sale that's still many years away from happening is uncertain at best. Most financial advisors would say it's unwise to rely solely on the money from a sale as your retirement income. Typically, the retirement savings plans available to small businesses owners fall into two categories:

  1. Individual Retirement Accounts (IRAs) — IRAs are long-term savings accounts that anyone with an earned income can open and contribute to. They offer a range of investment options and tax advantages. Depending on you and your business, a financial advisor may recommend opening a Traditional IRA, Roth IRA, or SEP IRA. IRAs are typically simpler and less expensive to set up and maintain than 401(k) plans.
  2. 401(k) — 401(k)s are typically offered by an employer to their employees as a tax-advantaged savings account that also feature a variety of investment opportunities. You can contribute to your own 401(k) plan, but only if you're compensated as an employee as well (for example, if you have a set salary), and your contributions must be similar to those made in your employees' account. If you're a sole proprietor, you can look into an Individual 401(k) plan. Some small business owners which are members of industry associations, for example construction or contracting companies can use the association’s 401(k) that’s established as a Multiple Employer Plan (MEP). MEPs often have lower costs, reduced administrative burdens and lessen your fiduciary responsibility. MEPs offer economies of scale for all of the employers involved by spreading the administrative, compliance testing, and audit costs across all of the participating businesses. A main advantage of 401(k)s over IRAs is that the contribution limit is much higher, allowing you to save and invest more.

Each type of plan offers different tax advantages. As no two businesses or business owners are alike, there's no one-size-fits-all solution for how to choose which retirement plan works best for you. A financial advisor can help you decide which route you want to take.

Appraise the Value of Your Business and Other Assets

While it's normal to be sentimental over your business – it is your pride and joy – you need to know the exact dollar figure you can attach to your business in its current market. Most business owners don't know the value of their business, and many overestimate how much it's worth. If you want your business to fund a large part of your retirement, incorrectly valuing your business could present significant challenges to your retirement plan.

At the same time, assess how your other investments are doing. A comprehensive review of all of your assets will allow you to fill in any unexpected gaps much more easily.

Make Sure to Have an Exit Strategy

You've built your small business into a profitable, self-sustaining entity – it may even be your biggest asset. But if you want to stop working, you'll have to liquidate that asset at some point. Do you plan on passing it down to a family member? Letting a current employee buy you out? Selling to another company or business owner? Alternatively, some small business owners choose to hold on to some of their business or gradually relinquish responsibilities over time while letting others take over the day-to-day operations.

Whichever option you choose, planning ahead is imperative so there aren't any surprises when you want to step down. Waiting until right before you retire could create the impression of a distress sale, and you might not be able to sell the business at full value. Some succession plans can lead to tax benefits when done correctly, and planning ahead can help you keep as much money in your pocket as possible.

Hire a Financial Advisor

Just as you understand the intricacies of your market, financial advisors understand the world of investing and financial planning, and know how to apply it to your unique situation. In addition to helping you with the above steps and planning for retirement, financial advisors can help you set up retirement plans for your employees, navigate tax season, manage risk, and offer insight into how to grow your business.


Preparing For Retirement as a Small Business Owner in St. Louis, MO | Correct Capital

As independent and fiduciary advisors, Correct Capital offers all our clients our I.O.U. promise: all the advice we give will be idependent, objective, and unbiased. It's our moral and legal obligation to do what's in your best interest. If you're a small business owner in St. Louis who wants to start planning for retirement, or are near retirement age and just want to make sure all the "t"s and "i"s are crossed and dotted, speak to an advisor today by calling 314-930-4015 or by contacting us online.