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5 Retirement Planning Strategies for Small Businesses Owners

Posted by and Eric Van DerHeide on Thursday, March 30, 2023

It’s easy to get distracted by the daily financial decisions of running your small business. But, don’t forget about your retirement plan. Keep these 5 strategies top of mind.

Image of a Small Business Owner Planning for Retirement

It can be tempting to put off retirement planning because your small business takes up the bulk of your time and responsibilities. But, retirement planning is critical when you want to step away from your business. There is no set time to retire, yet 42% of small business owners plan to retire at age 65 or older and 29% between ages 55 and 64. Only 19% anticipate retiring between the ages of 40 and 55. Whether retirement is 15 to 20 years away or five, you can benefit by starting the planning process now. 

When it’s time to enter the next phase of your life, you must have a plan that will help you live comfortably in the future. Think about retirement in four phases: accumulation, transition, distribution and legacy. The accumulation phase begins when you’re still working; then you make the transition to retirement, distribute your assets for yourself and your loved ones, and finally create the legacy you’ll leave for the next generation.

In this article, we’ll discuss the importance of retirement planning and strategies to help you gain future financial independence.

1. Define Your Retirement Goals

Retirement planning doesn’t happen overnight. You need time to put together your retirement goals and accumulate assets early for a solid financial cushion when you decide to retire. You should consider details like where you want to live, how much that will cost, what expenses you’ll have and where you’ll get your retirement income.

Start by answering the following questions:

  • When do you want to retire? Calculate how much time you have left at your business and how much money you need to save beforehand.
  • What kind of retirement do you want? If you intend to move or travel, make sure you have enough money in your retirement plan to support your lifestyle.
  • How much money do you need to set aside? Once you know when you want to retire and the kind of lifestyle you want, forecast how much money you’ll need. You may be able to adjust your retirement plan contribution levels annually based on your company profits and investment strategies as you get closer to retirement. A wealth advisor can help you define these goals and keep you on track.

Make sure your goals are written down, specific, measurable and time-sensitive, so you know how and when to achieve them.

2. Choose the Right Retirement Savings Plan

After you’ve outlined your goals, determine your retirement plan. Strengthen your retirement strategy and open the door to potential tax advantages with retirement savings accounts. Choose the option that best suits the needs of you and your business and how much financial independence you want to achieve in retirement. Below are some of the most common retirement plans:

Traditional or Roth Individual Retirement Account (IRA)

A Traditional or Roth IRA are the most basic options available. A Traditional IRA allows you to make tax deductible contributions. Taxes are deferred until savings are withdrawn. In a Roth IRA, taxes are paid upfront. The benefit is that withdrawals can then be made tax-free in retirement. Not everyone is eligible to contribute to a Roth IRA based on their income and the contribution limits are relatively low for these accounts.

Simplified Employee Pension (SEP) IRA

A SEP IRA is a type of tax-advantaged account used most often by those who are self-employed. This type of plan can be set up by either an employer or self-employed individual and allows the employer to make contributions to their employees’ accounts. It offers higher contribution limits and flexible funding options but requires employer contributions be made equally to all employees.

Savings Incentive Match Plan for Employees (SIMPLE) IRA Plans

A SIMPLE IRA is another tax-advantaged account and is designed for businesses with 100 or fewer employees. Employees can elect to contribute a percentage of their salary to a SIMPLE IRA account. You, as the employer, can then match up to a percentage of their salary; however, your company must match the same percentage for each employee who contributes. This plan has less administrative costs than a 401k plan but also has lower contribution limits and less flexibility.

Solo or Individual 401(k)

A solo 401(k) can cover you as a business owner and your spouse if they are employed by the business, but this may not be an option for you if you have additional employees beyond you and your spouse. For those eligible, it has higher contribution limits than an IRA or a Simple IRA plan and less administrative costs than a traditional 401k plan.

Traditional 401(k) Plan

One of the more popular options is the traditional 401k plan. This plan is funded with employee contributions and matching contributions from you as the employer. There is a lot of flexibility within how you design a plan for your business, and there are relatively high contribution limits for owners and their employees. The popularity of this plan also makes it a desirable benefit to help attract and retain talented employees. The administrative costs are higher for this type of plan than they are for many others making it cost prohibitive for some smaller employers.

Consult a financial professional to determine which option makes the most sense for you.

3. Diversify Your Retirement Savings

Having both tax-deferred (Traditional) and tax-free (Roth) savings may help with your current taxes and long-term planning goals. Look at your cash flow, current tax situation and long-term retirement goals to determine the optimal savings plan for you.

However, more important than diversifying the types of accounts you use, is diversifying your investment selections within these accounts. Avoiding a concentration of individual companies or even industries is important to managing your investment risk and increasing your odds of success. Mutual Funds and Exchange Traded Funds (ETFs) are a great way to achieve this diversification. But make sure to use funds with low expenses and a clear investment strategy. If you have a financial advisor to help you with these investments, make sure they are a fiduciary (an advisor who is required to act in your best interest). Unfortunately, not all financial advisors serve their clients in this capacity, so be sure to ask.   

4. Develop an Exit Strategy

Once you’ve established your goals and implemented a personal retirement savings plan, put together an exit strategy. Eventually you’ll leave your business or transition day-to-day operations to someone else. Although you might need years of planning to shape the future of your business, don’t leave it for interpretation before you retire. It’s your legacy. You can sell it to a family member, an employee or a third party. Whatever you decide, create a succession plan before you move on. The plan should include your:

  • Succession time frame and exit strategy.
  • Named successor(s).
  • Business valuation and marketability.
  • Tax implications and finances.

5. Meet With Your Financial Advisors

Creating a retirement plan for a business owner can take the help of a team of professionals. First, it’s recommended to visit with your wealth advisor at least five years prior to retiring. They will help guide you through the retirement planning process and tax planning strategies as well as offer general guidance about the different options available to you.

You’ll also want to talk with your CPA and business attorney. A CPA can offer tax advice regarding your succession and estate plans. A business attorney will make sure your business entity is structured properly, draft any necessary agreements, and also help ensure that your estate planning documents are in order. Together, these professionals can facilitate a tax efficient transition for you and your family as you prepare for the next chapter in your journey.  

People and circumstances change over time. The financial plan you’ve implemented may change over time, too. Review your plan periodically and adjust it based on your succession strategies or financial needs.

Reach out to our Wealth Management Team to learn about the retirement plan options that are best for your business.

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The Authors

Eric Van DerHeide

Eric Van DerHeide

President & Chief Operating Officer


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