3 Big Retirement Mistakes Small Business Owners Make

Two out of five small business owners have this problem -- do you?

Retirement planning is an important step for any small business owner. It can be easy to make costly mistakes, but with the right plan in place, you can secure a comfortable retirement. Small businesses are the backbone of our economy, accounting for 62% of net new job creation since 1995. Small businesses created 12.7 million net new jobs, while large businesses created 7.9 million in the past 25 years.

While many small business owners focus on building their business, they often neglect their personal finances. Here are three of the biggest retirement mistakes that small business owners make and how to avoid them.

1. Not planning for retirement

As a small business owner, one of the first things you did was create a business plan. This plan helps you run, manage, and grow your business. Just like your business needs a plan, your retirement needs one, too! Many entrepreneurs are so focused on growing their businesses that they forget about their own financial future.

As such, it's important to start planning for retirement as soon as possible, even if you're just starting up your business. This will help ensure that you have enough money saved up by the time you retire. As a small business owner, you have certain retirement benefits that you can take advantage of. Two retirement-savings options for small business owners are a Simplified Employee Pension (SEP) or a solo 401(k) plan (Roth or regular).

Contributions for both plans are tax-deductible and grow tax deferred until you withdraw the money. If you opt for the solo Roth 401(k) plan, your contributions are taxed, but your withdrawals are not. The advantage you get as a small business owner is that for a SEP and a solo 401(k), you can contribute 25% of your net self-employment earnings with a maximum limit of $66,000 for 2023.

2. Not having enough life insurance

Small business owners are often unprepared for retirement simply because they haven't planned for it. One of the most critical mistakes made is not having enough life insurance. Many times, small business owners try to juggle expenses from both their business and family lives, leaving the important purchase of life insurance forgotten. Small business owners also have an extra liability from their businesses. Unfortunately, close to two out of five (38%) of small business owners do not have enough life insurance to protect their business. The average life insurance gap for a small business is $1.38 million.

Having enough life insurance ensures a family's financial security continues after the death of a beloved small business owner, who may have been the primary breadwinner for their household. It also makes sure that in case of an untimely death, any dependents will continue to be provided for and that any debts incurred by the small business are paid properly. In addition, if you have business partners, key-life insurance can help smooth out the transition of ownership in the event of disability or critical illness. Having sufficient life insurance is essential to ensure peace of mind and provide financial stability in retirement.

3. Assuming you don't need help

Another mistake many small business owners make is assuming they don't need help when it comes to retirement planning. When you need help with business marketing, accounting, HR, or logistics, it makes sense to hire specialists and experts to help. The same goes for your finances.

There are a lot of different components involved in managing your finances during retirement, including investments and taxes. Having someone knowledgeable helping you can save you both time and money in the long run and ensure that all your bases are covered when it comes to your retirement savings plan. This includes creating an exit strategy for your business as well.

Retirement planning is essential for any small business owner who wants to have a comfortable lifestyle once they decide to step away from their business. While it can be easy to make costly mistakes along the way, understanding these common pitfalls can help you avoid them in the future and set yourself up for success during retirement. With careful planning and professional assistance, you can ensure that all of your hard work pays off.