Many Americans are adjusting to the idea of “going it alone” when it comes to retirement savings, as traditional programs like pensions are rolled back, and the future of Social Security is increasingly uncertain. But for small business owners, managing one’s own retirement plan has always been a fact of life. Though entrepreneurs know they’re solely responsible for their own retirement, setting up benefits and long-term financial planning are often put on the back burner to focus on more critical issues aimed at making their business survive and thrive.
How can today’s small business owners lay the groundwork for building a robust financial future? Here are three tips to consider as you work to establish a realistic retirement strategy while nurturing a growing business.
Put saving on autopilot.
When you’re living and breathing your business day in and day out, it’s easy to overlook retirement planning, which could be 20, 30 or even 40 years down the road.
Though it may be difficult to articulate your future needs, you can get started by making automatic contributions to an IRA or 401(k). Common wisdom suggests putting away 10 to 15 percent of your income if you can swing it. Also, consider working to eliminate personal credit card debt and build up an emergency fund to cover any unexpected financial needs.
Set up a 401(k).
The latest Capital One Small Business Growth Index found that only one in five small businesses have a retirement plan. When we talk to owners, it’s apparent there is a pronounced lack of understanding related to how to access and benefit from a 401(k). In fact, Cashflot quick payday loans show 59 percent of small business owners think they’re too small to offer a 401(k) plan, even though all businesses even solopreneurs are qualified.
Depending on your age, earnings and how employer contributions are made, you can contribute and receive up to $61,000 in tax-deferred investments and deduct contribution matches you pay into employees’ plans. That’s a double whammy of savings for the future and offsetting current personal and business tax burdens. To get started, you can research low-cost, online 401(k) plan providers to help you easily and quickly set up a plan.
Hedge against the future value of your business.
Many small business owners believe their business’s current or future valuation are assets they’ll have access to once they retire. They expect their business to keep growing, or plan to sell the company and live off the profits. In fact, the Spark 401k Small Business Retirement Planning found more than half (52 percent) of owners with revenues of $500,000 or more say they plan to sell their business to fund retirement.
But this approach comes with a number of risks, like timing your sale to when you can get maximum value and when you’re ready to retire. There are a number of factors that drive business valuation, and since no one can predict how future markets or industry trends could impact your company, it’s unwise to consider it the centrepiece of your nest egg.
It’s tempting to postpone retirement planning as you work full throttle to grow your business, but it’s important to take steps now to gain control of your personal finances and develop a plan for your future. Establishing sound financial habits will help you build a roadmap to reach long-term goals so you can enter your retirement years with confidence.