Retirement Planning for Small Business Owners

Running your own small business can be extremely rewarding. However, the demands of entrepreneurship often mean retirement planning gets neglected. With no corporate pension or 401(k) matching, the responsibility of saving for retirement falls squarely on the small business owner. That makes actively planning for your retirement years even more critical. These are the top 10 tips of retirement planning for small business owners

10 Tips of Retirement Planning for Small Business Owners

1. Open and Fund Retirement Accounts

Take advantage of tax-deferred retirement accounts tailored to small business owners like SEP IRAs, SIMPLE IRAs, and solo or individual 401(k)s. Funding these regularly is vital since you don’t have employer contributions. Contribution limits are higher than normal IRAs too. For 2023, you can contribute up to $67,500 across accounts if under 50.

Consistently funding retirement accounts with automatic monthly transfers is key. If cash flow is tight, start small and gradually increase contributions over time. Getting in the habit early and sticking with it makes a major impact long-term.

2. Set Up a Deferred Compensation Plan

A deferred compensation plan allows small business owners to set aside a portion of income before taxes to be paid out at a later date, such as retirement. The business deducts the amounts, lowering its taxable income. Funds grow tax-deferred until withdrawal. This functions similarly to a 401(k) without the administrative costs.

3. Invest in Dividend-Paying Stocks

Dividend stocks that pay shareholders a portion of profits quarterly provide consistent retirement income. Building a portfolio of stocks across market sectors delivers growing dividend income. Many stocks increase dividends over time too. This gives a predictable income stream without selling off the underlying shares.

Retirement Planning for Small Business Owners

Build dividend income gradually in brokerage and retirement accounts. Reinvesting dividends allows compound growth. (Reference) Quality dividend stocks act almost like low-risk bonds with higher income.

4. Purchase Rental Real Estate

Owning rental real estate provides ongoing income from tenant payments. While starting small with a single property, rental income grows over time as your portfolio expands. Many small business owners invest in real estate early on to supplement entrepreneurship income with steady rent checks.

Owning rentals does involve effort in finding/managing tenants and maintenance. But done right, rental income delivers returns for decades including retirement. There are also tax advantages to real estate investments.

5. Explore a SEP IRA Conversion

For small business owners with an existing SEP IRA, consider converting it to a solo 401(k) once your business has employees. Solo 401(k)s allow larger annual contributions than SEP IRAs. Conversions are easy and you can still make large deductible employer contributions to turbocharge retirement savings.

6. Shift Business Ownership Over Time

To continue growing retirement savings while reducing active work, small business owners should consider shifting ownership stakes gradually to key partners or employees. This transition plan enables you to step back from daily operations while still retaining some ownership income.

7. Designate a Retirement Age and Stick to It

When you own a thriving business, it’s tempting to work indefinitely. But it’s important to designate a retirement age ideally in your 50s or 60s and develop a business succession plan. This keeps you focused on stepping back to pursue other goals rather than tying your identity to the business. Make retirement plans a priority.

8. Review Your Estate Plan

Small business owners need robust estate planning to protect both personal and business assets. Work with an estate planning attorney to set up crucial documents like a will, trusts, buy-sell agreements outlining successor plans, and power of attorney.

Name beneficiaries on retirement accounts and update plans whenever major life events occur. Proper estate planning helps ensure your retirement funds and business assets are handled as intended if the unexpected happens.

9. Prioritize Health, Wellness and Self-Care

Retirement Planning for Small Business Owners

Owning a successful small business requires significant effort and stress. But don’t neglect your physical and mental health. Make health, nutrition, fitness and self-care a priority. This better positions you to work hard now and enjoy an active retirement later.

Build regular vacations into your schedule, even if brief. Pursue stimulating hobbies unrelated to work. Don’t overlook the importance of staying healthy and balanced. Your future retired self will thank you.

10. Envision Your Ideal Retirement Lifestyle

Get specific about what an ideal retirement looks like for you. Do you want financial freedom to travel the world? A waterfront cottage to enjoy peaceful days? Starting a nonprofit to give back? Time with grandkids? Your personalized retirement vision is motivation to diligently build your nest egg now

Conclusion:

Retirement planning is easily overlooked when devoted to business success day-to-day. However, implementing these tips helps small business owners take control and proactively prepare for the life they want after their entrepreneurial career. Keep your retirement goals top of mind.

FAQs About Retirement Planning for Small Business Owners

How much retirement savings should a small business owner have?

Financial experts recommend small business owners save 12-15% or more of their income annually for retirement across investment accounts. Aim to accumulate at least 10 times your last annual income by retirement age. This provides substantial savings to draw income from.

What are the best retirement accounts for small business owners?

Great options include SEP IRAs, SIMPLE IRAs, and Solo 401(k) plans which offer higher annual contribution limits than standard IRAs. Combining accounts allows small business owners to maximize tax-advantaged retirement savings.

How can a small business owner generate retirement income?

Owning income-producing assets like rental properties, dividend stocks, peer-to-peer lending investments, and bond ladders provides steady retirement income for small business owners. Gradually shifting business ownership to employees helps too.

Should small business owners prioritize retirement or business growth?

Small business owners need to balance both but retirement should still be made a priority. Consistently funding retirement accounts ensures you can step away from the business on your own terms later. Don’t neglect personal financial goals while growing the business.

What retirement planning mistakes do small business owners make?

Common mistakes include not opening tax-advantaged accounts, failing to create a savings and investment strategy, dipping into retirement funds for the business, delaying retirement planning, not having a succession plan, and forgetting to enjoy life now assuming business success will fund later retirement.

A Ahmad
A Ahmad

A Ahmad, a certified financial planner, Retirement Step was created to share over two decades of retirement planning experience with readers looking to take control of their financial futures.

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