We hear a lot about the importance of saving for retirement, and this applies whether you're a salaried employee or the owner of a small mom-and-pop store that's been in your family for years. Yet a surprising number of small-business owners aren't preparing adequately for the future. According to Manta, one-third of small-business owners don't have a retirement savings plan in place.
If you own a small business, it's critical that you establish some sort of long-term plan, whether on your own, or with the help of a trusted financial advisor. Here are a few ways to get started.
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1. Create a retirement budget
Though it's not always easy to predict how much you'll wind up spending in retirement, the sooner you get a sense of how much income you'll need to stay afloat, the more accurate a goal you'll have to work toward. Since you're self-employed, your business might be offsetting some of your existing living costs. For example, you might currently be leasing your personal car for your business, or taking a home-office deduction if you conduct business out of the house. But these benefits won't be available once you're no longer generating an income, so keep them in mind as you attempt to map out your future budget.
2. Find the right retirement savings plan
Small business owners have several options when it comes to saving for retirement -- options that salaried workers don't have access to. The first one you might consider is the solo 401(k), which works just like a regular 401(k), only with one added benefit -- the ability to contribute up to 25% of your business earnings for a total annual limit of $54,000 if you're under 50, or $60,000 if you're 50 or older. Like a regular 401(k), solo 401(k) contributions are tax-deductible unless you opt for a Roth account, in which case you'll pay taxes now, but enjoy tax-free withdrawals in retirement.
Then there's the SIMPLE IRA, which, if you're self-employed, allows you to contribute up to $12,500 per year if you're under 50, or $15,500 per year if you're 50 or older. Furthermore, with a SIMPLE IRA, employers must make contributions on behalf of participating workers, either by matching employee contributions up to a maximum of 3% of salary, or contributing 2% of employees' salaries up to a maximum of $5,400. If you don't have many (or any) employees, a SIMPLE IRA could be an effective means of saving for retirement, but if you have a large number of people who work for you, it could get expensive.
Finally, there's the SEP IRA, which, if you're self-employed, lets you contribute up to 25% of your net business income per year, up to a maximum of $54,000. The one drawback to the SEP is that, as a small business owner, you're required to contribute the same amount to your employees' accounts as you do to your own. But if you don't have any employees and want to save in an IRA, you'll get more flexibility with a SEP than you will with a SIMPLE.
3. Ramp up your savings rate
Once you figure out where you're going to put your money, your next move is to work on increasing your savings rate to give your nest egg a decent amount of time to grow. Even if you start out with relatively small contributions, by steadily increasing the amount you put into your savings plan, you'll have a good chance to make up for lost time -- especially if you're eventually able to max out a plan with a generous limit to begin with, like a Solo 401(k), or a SEP IRA.
Of course, the challenge many small-business owners face in saving for retirement is that they prefer to reinvest their earnings in their companies rather than set that money aside for the future -- so you'll need to work on striking a balance. That might involve pumping more cash into your business during its early years to build it up, and then boosting your retirement savings rate once your company is well established. Or it might mean taking advantage of years with better profits and socking away the difference for the future.
If you're a small business owner, it's critical to take retirement planning into your own hands. The sooner you begin focusing on the future, the better equipped you'll be to make smart decisions for yourself and your business in the present.
