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Retirement Planning For Small Business Owners

Retirement Planning For Small Business Owners

April 12, 2022
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Retirement Plan for Small Business Owners

As a business owner, you are technically excluded from defined benefits pension plans. But when proper accounting principles are followed, you are supposed to be a registered employee in your business. In other words, the company you own is your employer. 

In that case, what kind of retirement plan is suitable for you? Read on, and you'll find the answer to this and other relevant questions in this retirement planning guide for business owners. 

Without a good plan, the thought of retirement could be a source of worry. But life doesn't have to be that way. 

Inside this guide, you'll discover some practical steps you can take to make that future life a joyful one. Regardless of whether you started early or not, one thing is certain. A good life at a time in the future hardly happens by accident. Even though your plan may not come to fruition 100%, planning will put you a few steps ahead of other people in your age bracket.  

Decide When You Want To Retire And As A Business Owner When You Want To Start Planning For Retirement.

I have no idea how old you are. But here is what I know. Taking the time to read this piece is proof that retirement planning is now a priority in your life. 

Interestingly, the very first thing to decide is when you want to retire. To get this out of the task, you have to take your current age into account. 

How old are you now and when do you want to retire? That's the first question you have to answer. Why is that important at this stage? 

When you retire, you'll stop working. And when a greater percentage of your income comes from active work, you'll also stop earning money. When that happens, how will you maintain your desired lifestyle by that time? 

Getting clarity in this regard is one benefit of retirement planning, especially when it is started early enough. 

Start Paying Down Your Debt 

It doesn't matter the type of retirement plan you choose. When you have a debt burden, it will limit your ability to save for retirement or investment. Irrespective of how hard it may seem at the moment, exploring some professionally guided debt reduction strategies will be in your best interest. 

Check to see if you have some bad spending habits that need to be broken as a matter of urgency. Do not delay this further till tomorrow. Time waits for nobody. On the other hand, you may want to invest in some financial advisory services. 

Assuming you have the resources, paying more than the required amount per month will help you pay down your debt faster. Moreover, it will be helpful to prioritize high-interest debts first. 

Finally, maintaining some level of consistency in this regard will free up some funds for retirement savings. 

Create A Retirement Budget

How much money do you need to retire well? 

Think about your current standard of living, income, and expenditure. From that point, you should begin to get a better idea of the life you want to live during retirement. While it may be hard to clarify the flow of your daily, weekly, and monthly living expenditure, think about the items like housing, food, health, and other life necessities. 

Just try to list as many recurring expenses as possible. Perhaps, it is important to consider the fact that inflation will always affect the price of basic utilities. Let's say you are living comfortably at this moment, expect to spend around 80 – 90% of your annual income during retirement. 

From that perspective, you can start planning how to replace your current income during retirement. This is the point from where you can start setting your retirement savings and investment goals. 

Choose A Retirement Plan 

As a small business owner or self-employed person, the type of retirement plan made for normal employees is likely not the best for you. But then, you have to choose a plan for your retirement savings and investment. Below are the best options for people like you. 

Solo 401(K) – With this plan, you'll have the ability to contribute before and after-tax dollars. Moreover, you can invest in any of your choices. When you choose a broker that provides free Solo 401(K) accounts, you don't have to pay extra fees. Using this retirement account, you can contribute up to $20,500 as an employee/self-employed person. 

Simple IRA – This is the best retirement account meant for small employers and business owners with fewer than 100 employees. Assuming you are earning more than $5,000, you can set up a Simple IRA account. One basic rule here is that employers must add to the account.  

Moreover, you can match the contribution up to 3 percent of an employee's salary. Another feature of this account is that employees are fully vested after receiving the contributed amount. That means the funds will become accessible to employees immediately. If you have a small business with your name on the payroll, this might be the best option for you. 

SEP IRA – With this plan, all employees must receive the same contribution. It allows It allows self-employed people to create a retirement plan for themselves and their employees. When you sign up for this plan, you'll have a tax-deferred way to save for retirement. However, there is a maximum contribution limit of $61,000 per annum. 

When Retirement Planning As  a Business Owner Avoid These Mistakes 

Irrespective of age, we all are prone to mistakes at some point in our lives. Perhaps, identifying the mistakes made by others can point you in the right direction. Whether you are ready to start your retirement planning now or sometime in the future, below are some retirement mistakes to avoid. 

  • Ignoring the need to plan
  • Not leveraging tax breaks 
  • Eating up your retirement fund 
  • Leaving employer benefits on the table 
  • Waiting for a long time to start
  • Underestimating housing and medical cost 
  • Increasing your pre-retirement debt 

Even though this retirement planning guide wasn't written to be exhaustive, it serves as a pointer to get you started. Take the steps listed here, and you'll get close to your retirement goal. If you ask me, the best time to start is now, not later. 

Should you need any help along the line, it might be helpful to engage a professional financial advisor.