Running a Small Business? Don't Neglect Your Retirement Savings

Focusing only on the demands of today could cost your future self dearly.

Many small business owners find it hard to save for retirement. According to a 2019 study by SCORE, an organization that mentors small businesses, over a third of business owners don't have retirement savings plans in place. It's understandable -- time and money are often tight when you're running your own company. You may feel like every spare cent is tied up in either keeping the business running or investing for growth.

It can also feel like old age is a long way away and there'll be time to catch up further down the road. A lot of small business owners may find retirement planning is another of those important-but-not-urgent jobs that always get pushed to the bottom of your to-do list. Here are some of the reasons to make it a priority.

Why retirement planning matters for small business owners

There are several reasons business owners of all sizes can benefit from retirement planning. The biggest is that no matter how much you love your company, at some point you may want to stop working. That may be a choice you make, or it may be forced upon you by ill health or factors outside your control. Either way, it's important to be ready.

1. Retirement accounts have tax benefits

One of the main barriers small businesses face when setting up retirement plans is cost. But you may be able to offset some of those costs with the Retirement Plans Startup Costs Tax Credit. According to Forbes, only 4 in 10 businesses with less than 100 employees offer retirement benefits. Retirement planning can also help your employees and make you a more attractive employer.

In addition, the common retirement account options are tax-advantaged, meaning you could reduce your tax bill either now or in the future. The right option for you and your company depends on how many employees you have, and your financial situation.

Check out our guide to business retirement plans for more info. Here are some of the possibilities:

• Solo 401(k)
• SEP-IRA or Simplified Employee Pension
• SIMPLE-IRA
• Traditional IRA
• Roth IRA

2. The earlier you start saving, the more time your money can work for you

One reason not to kick the retirement can further down the road is that you don't know what will happen. You may face other expenses in the future that stop you catching up on your retirement contributions. Another is that the longer your money has to work for you, the better.

Compound interest is a powerful tool that can generate significant returns over time. It essentially means you can earn interest on your interest. Here are two hypothetical scenarios that show the difference starting early can make to your retirement.

• You invest $10,000 when you are 25 and don't touch it for 40 years. If you earn an APY (annual percentage yield) of 8% on your investment, it could be worth over $200,000 by the time you're 65. That's without making any additional contributions.
• You invest that same $10,000 when you are 45 and don't touch it for 20 years. Your money wouldn't have as much time to compound and you'd have to invest a lot more to reach the same point. Assuming the same 8% APY, it would be worth around $50,000 by the time you hit 65.

There are no guarantees when it comes to investing, but historically the S&P 500 has averaged returns of more than 8% a year, making this a reasonable way to estimate potential rewards. The more you can invest early, the less you'll have to save later in life.

3. You may not be able to sell your business when you want to

Almost 20% of the business owners surveyed by SCORE said they planned to sell their businesses to fund their retirement. The trouble is that other studies show that many small business owners won't be able to sell their companies when the time comes. Indeed, the sobering truth is that there may not even be a company to sell: Data from the Bureau of Labor Statistics, shows that only around a third of new businesses will survive their first 10 years.

If the majority of your net worth is tied up in your company and you can't sell it for whatever reason, you won't be able to use that cash to pay for your retirement. Relying only on the proceeds of selling your company is a bit like investing in the stock market and putting all your money into a single stock rather than building a diversified portfolio. If you hope your business will fund your retirement, think about ways you can make it just part of the plan -- not the only plan.

Plan for your retirement today

One of the challenges of running your own business is that you're responsible for a whole bunch of responsibilities, including planning for your retirement. Don't fall into the trap of thinking that your company will eventually generate the cash you'll need in your old age or that you'll be able to keep on working forever. Do some research and decide which retirement plan will work best for you and your company, and start making contributions now.