Don't Ignore Retirement Savings
In part 1 of this blog series we talked about how succession plan is especially important if you want your business to continue well beyond your career or your lifetime. It also matters if you need to monetize your investment by selling the business in future. The first step is to figure out what you want for and from your business in the long term.
Being your own boss means providing for your own retirement. It also means that there isn't an employer looking over your shoulder who will sign you up for a plan. You have to be more proactive in setting your retirement money aside. But how?
Start with the end in mind. Understand the prospects and limitations of your business including when and how you'll add to your retirement savings. Despite the best business plan, it is too easy to assume that your business is your retirement plan—and that could be a very costly mistake.
To achieve good retirement savings, many people put aside 10 percent of income as young adults and then during the middle-age—typically the time of highest earnings—practice "burst savings." This is the practice of saving raises, greater slices of pay, and windfalls and many believe it leads to financial success.
Burst savings are far more easily said than done for you, an entrepreneur who will almost certainly endure extreme income highs and lows over your working life. In the beginning, keep your personal overhead as low as you can and save as much of any cash influx as possible until you secure a personal net worth you're comfortable with.
Know how much you need in savings if you want to or must stop working someday. Understand your own needs for financial comfort, as well as your investment portfolio's payout rate. This is where a financial planner can lend value to an entrepreneur.
Be smart about risk. Confidence can serve entrepreneurs well. It's important, though, to train yourself to take calculated risks after cool analysis.
Retirement Savings Options
Having a variable income, which is often the case for people who own a business, makes it harder to save for retirement. When it comes to saving for your future self, where do you start and which is the best option?
Here are a few common retirement accounts for business owners:
Solo 401(k). You are the employee and employer, so you can add $18,500 in contributions ($24,500 if age 50 or over) and up to 25 percent (to a maximum of $55,000) of additional self-employment income in 2018. If you're an entrepreneur with no employees, you can include your spouse. Learn more about 401K plans here.
SEP IRA. You can contribute as much as 25 percent of your net self-employment income, up to
$55,000. If you build your new business on the side while holding another job where you contribute to a 401(k), you can still contribute to a SEP, but there are additional rules.
Savings incentive match plan for employees (SIMPLE) IRA. Similar to the Solo 401(k), some contributions are considered, for tax purposes, to be from the employer and some from the employee.
Employee contributions cannot exceed $12,500 this year and employers must either match each employee's salary reduction dollar for dollar up to 3 percent of compensation or make a standard non-elective contribution.
Defined benefit plan. A traditional pension in which employees expect a fixed and pre-determined benefit at retirement, these plans are designed for high-cash flow businesses with consistent revenues. Though regular and high contributions are required from entrepreneurial employers, these plans can provide successful entrepreneurs much higher tax benefits than other types of retirement accounts.
*Information validated as of September 2018.