7 retirement strategies for small business owners

Sitting in your retirement home and looking back at the good times is the dream. After years of toiling for a living, you deserve some peace and quiet in a comfortable retirement home. But how do you prepare for a perfect retirement if you are a business owner with so much to do?  

The answer is not far-fetched. How you live your life now will have an impact on the kind of life you live in retirement. Currently, one-third of small business  owners don’t have a retirement savings plan in place.

That’s why in this article, we’ll share a few tips for retirement planning for small business owners.

Why is a retirement plan necessary for a small business owner?

As a small business owner, your years in business may come with a few luxuries, benefits, and financial security, unlike what full-time workers have. You are your own boss, and the burden of saving for your retirement falls solely on your shoulders. 

With this in mind, you should see why the need to weigh your retirement plan options for small businesses cannot be overemphasized.

A retirement plan is necessary because it:

  • Helps you to offer your family financial security in the long term.
  • It guarantees your  financial independence.
  • Offers tax benefits that can help you save more money for your future needs.

However, retiring in style without depending on anyone means you will have to change certain habits and unlearn poor financial practices. This is true even in sudden wealth management. You need to have a plan to continue paying your bills without having to rely on your business for income.

What difficulties do small business owners face when they retire?

Here are the challenges small business owners often encounter in the US::

  • Struggling to save for retirement because of lower income.
  • Finding a plan that fits their unique needs and fits their lifestyle, especially if they have a family and/or have other responsibilities.
  • Struggling with physical or mental health issues that prevent them from working and/or making decisions

Many small business owners struggle financially when saving for retirement. Here are a few potential solutions to the problems listed above.

Questions you should ask about retiring

We have a list of critical questions you should ask yourself before retiring. These questions are necessary to channel your focus and responsibilities towards your ultimate goal.

When will I retire?

Setting the date you plan to retire marks the start of your retirement preparations. Determine when you intend to retire to calculate how much time you have left and how much money you need to save before that date.

What kind of retirement lifestyle do I want?

The life you have in mind when you retire will spell out the plans you need to make today. For example, if you intend to travel a lot, it’s probably a good idea to pump some more money into your retirement plan.

If you intend to be absent from work, volunteer or take on a few extra responsibilities, you still need to channel some more money into your retirement savings. 

How will I pay for my retirement?

Contributing to your pension plans as a small business owner takes on a rather unique approach. Normally, employees agree with their employers on how much should go into their retirement savings and where this amount can be deposited.

Should you choose an agency to oversee your plan, ensure that they follow the restrictions laid out by regulatory bodies (more on that later).

You may also take the short but risky path of selling your business and using the money to sponsor your retirement.  We strongly advise against this route because a buyer may not be readily available when you want to sell.

Unfortunately, you have one shot at retirement, and every step counts. That’s why you should consider getting counsel from an expert retirement income planning in Portland, Oregon

What type of future do I want for my business?

You will eventually leave your business or delegate day-to-day operations to someone else. Although you might need years of planning to shape the future of your business, leaving it for retirement is something else. You can sell it to a family member, an employee, or a third party or pass it down to your kids. Whatever you decide, be sure to put things in order before your departure.

Types of Retirement plans

There are a variety of different types of retirement plans, including 401(k)s and 403(b)s. Other retirement investment options include

  • Defined Contribution Plans (Self-employed 401(k) and Traditional 401(k)
  • IRA Plans (SIMPLE IRA, SEP IRA, Roth IRA)

Defined Contribution Plans (DCPs)

Corporations with a large number of workers commonly use this plan. The 401(k) plan (DCPs) is the most widely used retirement plan that entails a combined employee percentage contribution and an employer match contribution.

DCPs are not suitable for small business owners. The 401k is divided into two sections or types: Solo 401(k) and Traditional 401(k) (k).

A solo 401(k) is an excellent retirement plan for small business owners who do not have employees. This plan's contribution limit is significantly greater than the traditional IRA contribution limit. 

Traditional 401(k)s, on the other hand, are frequently used for businesses with workers but will not work for small business owners who receive a salary like an employee.

IRAs (SIMPLE IRA, SEP IRA, Traditional IRA)

IRA stands for "Individual Retirement Account," It is the most basic plan available. The majority of people prefer to use this retirement plan. Both employers and employees can benefit from IRAs, and you do not need to obtain a separate retirement plan for yourself.

Owners can contribute to an IRA in 2022 for $6,000. 

IRA (Traditional IRA)

Here bosses take out a percentage of their worker's income and deposit it into an IRA. Workers can choose the amount they intend to commit to the plan, while their bosses simply facilitate it.

SEP IRA

SEP, or Simplified Employee Pension, is the ideal IRA plan for small business owners and entrepreneurs. The money goes into an Individual Retirement Account and a Roth IRA. The amount you can contribute is higher than what is allowed in a traditional IRA. As an employer, you qualify for tax breaks. You can invest in other programs.

SIMPLE IRA Strategy

This strategy is the only IRA plan available to both employers and employees. A requirement to participate in this plan entails that your staff number should be less than one hundred workers. Using this plan restricts you from having another plan. Your bank or financial institution will handle the majority of the paperwork is an excellent feature of this strategy.

We understand that these retirement plans aren’t always clear. For more information about retirement and financial planning for small business owners in Portland, don’t hesitate to get in touch with Interactive Wealth Advisors today!

7 practical planning tips and strategies

If you’re serious about planning for retirement, you can consider a few things before shopping for your savings account. Here are a few practical retirement planning tips and strategies for business owners:

  1. Create an exit strategy.

It's one thing to start putting money away for retirement, but it's another thing to leave your job. An exit strategy is simply a roadmap of how you will transfer assets and management to another person, or, perhaps, leave your business for retirement. 

The exit strategy or retirement for small business owners must be carefully mapped out.

  • Should I sell my company to a long-term employee or a family member?
  • Should I hand over control to a stranger? It should also be at the top of your priority list.

The answers to these questions should provide more insights into when to quit, how much profit to reinvest, and how much to save.

Remember, whichever strategy you prefer will significantly affect your tax, overall payout, and ultimate satisfaction.

  1. Prioritize your strategies

It pays to have a well-rounded retirement plan. The inability to prioritize your set goals can have a negative impact on your retirement goals. Right now, your business is your most valuable asset, and reinvesting a significant portion of the revenue is a good idea.

  1. Choose the right plan

Not every small business owner's retirement strategies will work for you and the nature of your business.

Choose a retirement plan that best suits your needs and ensure that you receive the right advice. Start with a retirement plan discussion with your current or future employer. You may also want to start using an online retirement plan calculator.

  1. Changes in lifestyle

Changing lifestyles can have a significant impact on the way your retirement plan comes together. When making a cognitive move toward retirement, a good place to start will be to examine your expenses and separate your business expenses from personal expenses.

Next, decide where you want to live when you retire and factor in any mortgages and outstanding debts. Minimize any financial dependence on family and cut down unnecessary expenses.

If you’re having trouble doing all these, get in touch with a financial planner to make the process more seamless and accurate.

  1. Hire an expert 

Planning for retirement requires a certain level of financial knowledge. To make life easier for you, contact a fee-only financial planner in Portland, Oregon. An expert financial planner will take on the responsibility of decision-making and will work in your best interest while you focus on other things.

  1. Have multiple investments

Do not put all your eggs in one basket. Make investments in multiple sectors to diversify your holdings. With more than one brokerage account, you have more diversified investment possibilities, and thus, improved financial security.

  1. Do not touch your retirement savings.

Taking money out of your retirement savings regularly defeats the purpose of having a retirement plan. Your money will not grow. Even when your finances are headed down the drain, never send your retirement money with it.

Final word

Retirement planning is a process that starts when you decide on your goals and priorities in life. If you’re not sure where to get started, seek the assistance of a financial planning expert at Interactive Wealth Advisors.

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