Five Things Small Business Owners Need To Know About Retirement

Five Things Small Business Owners Need To Know About Retirement

A majority of America’s small business owners are not saving for retirement. Many know they should, but feel that saving will hurt their business. According to David Deeds, Schulze Professor of Entrepreneurship at the University of St. Thomas in Minneapolis, small business owners do not save because they consider the business their retirement plan. “The plan is that when they retire, they are either going to transfer the business to a family member in exchange for a share of future wealth or a buyout or they are going to sell it off and turn that into cash.”

However, many circumstances may prevent the sale of a small business. Even if the business can be sold, the sale may not provide enough income to cover one’s entire retirement. Entrepreneurs may also have to retire earlier than they expected due to health problems or other unforeseen events.

Having a well-rounded retirement plan can help protect entrepreneurs against these and other risks. Here are five things small business owners need to know to plan their retirement effectively.

First, know the numbers. Small business owners should calculate how much money they will need to live on in retirement. Factors such as where they want to live (a pricier home or a modest apartment), how they want to spend their time (traveling or working part-time), and healthcare costs play an important role in this assessment.

Once they have an idea of how much they will need, entrepreneurs should get a valuation of their business to see if its sale or transfer is a viable retirement option. As part of their valuation, small business owners should consider whether the business can operate without their involvement. If it cannot, it may be difficult to sell or generate income from it once the business owner retires.

Next, determine a goal. This might seem elementary, but the power of having a firm vision for the future of a small business and retirement cannot be overstated. Entrepreneurs who set firm goals take steps to make sure their goals are met. This helps them find the best tools to save and also prepares them to wind down the business when it is actually time to retire.

Know the best tools. Business owners do not need to move significant amounts of money from their business in order to start saving for retirement. Investing just a little bit can help entrepreneurs save on their present-day taxes until they make withdrawals in retirement. There are four main instruments to choose from.

SEP-IRA: Like a traditional IRA, this retirement plan is tax-deductible. For returns filed this year, small business owners can contribute up to 25% of their income or $54,000. A SEP-IRA is a great retirement plan for sole proprietors because it is self-directed, but the 401(k) described below offers similar benefits but may be more cost effective due to lower administration fees.

Simple IRA: This plan is designed for entrepreneurs who employ 100 or fewer employees. Like for a 401(k), contributions are taken directly from employee paychecks and are pre-tax. Contributions cannot exceed $12,500 in 2017, but employees who are 50 or older may contribute up to $15,500.

Solo 401(k): This plan is for sole proprietors but may include the proprietor’s spouse. Proprietors may contribute up to 25% of their salary plus up to $18,000 ($24,000 for people aged 50 or older), but the total contribution may not exceed $54,000. A spouse who works in the business may also contribute the same amounts.

Simple 401(k): Small businesses with 100 or fewer employees may utilize this plan. Owners and employees have the option to contribute up to $12,500 this year, or $15,500 for people aged 50 and older. This plan also allows for borrowing against it and making penalty-free withdrawals to cover financial hardship.

A sole proprietorship, a partnership, limited liability company, or corporate can qualify for every plan except the SEP-IRA.

Keep investments simple. Most small business owners should probably invest in a globally diverse collection of low-cost index funds. An index fund invests broadly across entire markets like the U.S. stock market, U.S. bond market, and developed foreign stock markets.

Another option for simple investment is a target-date fund, which automatically adjusts the balance of fixed-income investments based on age and the selected date.

Diversify all investments. Diversification does not apply only to the retirement plans described above but to any asset a small business owner may choose to invest in. Getting all of one’s savings or investments caught in one basket can be risky.

This is especially true of home ownership. The real estate market is cyclical, so it can yield high returns or unexpectedly big losses. Small business owners who place most of their net worth in their home are cautioned to spread their wealth around.

Put it all together. With their numbers as their foundation and their goals in mind, small business owners have terrific opportunities to save for retirement. By utilizing the tools we describe to invest in a diverse portfolio, more small business owners can effectively build their wealth without hurting their present-day business growth.

Goldstone Financial Group: Financial Health: Get Out of it What You Put Into It

Goldstone Financial Group: Financial Health: Get Out of it What You Put Into It

Those most successful at putting money away—whether through savings, investments, or retirement structures—most likely have at least one thing in common: They give regular attention to the picture of their finances and how they are managing them.  Much like your physical health, your financial health is dependent upon taking a proactive, rather than a reactive, approach to its maintenance. For most investors this makes sense in theory, but when it comes to the actual implementation there is a lot of noise, all of which can be misleading if taken out of context, especially if the advice doesn’t necessarily pertain to your personal financial picture.

As we always remind our own investors, all good financial advisors will make sure to learn about your individual situation before providing any advice, so take this information with care. However, the four things we list below are crucial pieces of the financial puzzle, which apply to nearly anyone trying to grow wealth, in any amount.

Pay attention to your consumer-debt ratio: While pretty much a given, even the New York Times will tell you that you always want to be earning more than you are spending—probably because it bears reminding in this consumer-drive society.  Your consumer debt ratio is determined by dividing your assets by your liabilities. Now, ideally, this number will be positive, indicating that you own more than you owe. More often than you’d think, however, the reverse is true. According to a study by popular Nerd Wallet, the average household is continually growing and currently at about $130,922. With social security disappearing, this is particularly concerning for the younger generations. More on that below.

Create an Emergency Fund: Like a savings account, this money sits aside in the event that you need access to an unusually large amount of liquidity, in a short period of time. The standard emergency fund amount recommended is the equivalent of three months salary, however, if you are a dual income home, make that the equivalent to 6 months of salary. Emergency funds ensure a certain amount of flexibility should something unexpected—a sudden accident or illness, or the need to take time off from work—befall you or your family.

Max out your retirement accounts: This is important at any age, and especially as you get closer to retirement, but its equally if not more important when you are young. In addition to the fact that social security is only guaranteed until 2035, this allows the younger generation to put money away when they don’t need to use it to care for dependents. It also encourages a habit early on, that will ideally compound over a lifetime. It’s also helpful to actively picture what your retirement looks like, so that you have some idea of the type of lifestyle you are saving toward, and what it will cost to support that. For more tips on saving for retirement read “Making the Most of Life After Work.”

Be respectful of inflation: This is true with regard to the national inflation we experience collectively, but should also be taken into account with the natural inflation that occurs in each of our lives as we age. Many people fail to track their earning and spending trajectories based on their future circumstances and situations, which can wreak unexpected havoc when significant shifts in spending are caused due to big life transitions, like moving or having a baby. Planning well in advance of the natural inflation of your life will also be helpful in protecting your financial health.

Credit Score: Of course, we can’t leave out the credit score. While bemoaned for its haunting qualities in many situations, your credit score can very easily be coaxed to work in your favor as long as you treat it right. And these days, it can dip or rise within a matter of days based on your recent financial activity. Some people simply ignore their credit score, allowing it to work entirely to their detriment by not paying attention, but those who are proactive about their rating can do infinitely more good. Just take a look at U.S. News and World Report’s strategies on quickly raising your credit score.

Studies show that those who are cognizant enough of their finances to be able to easily check in on and understand the above are far more likely to experience financial success because they are, in essence, conditioning themselves for it.

Visit Goldstone Financial for more information on how to ensure your financial health.