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From being unaware of plan options and contribution limits to not having a plan at all, there are some common mistakes small business owners make with retirement preparation. — Getty Images/andreswd

This article was contributed to CO— by Clayton Alexander, investment advisor and president of Teton Wealth Group.

Small businesses keep America’s economy robust. In fact, 99.7% of companies in the United States are comprised of businesses with 500 or fewer employees. But too often, small business owners are so busy running their companies that they neglect their own personal finances and put off planning for their own retirement.

Here are five retirement pitfalls that small business owner should avoid.

Not working with an expert

Many small business owners have no HR department, nor do they have a dedicated financial representative. The years go by, and they continue operating with a lack of information about the retirement options they might have available to help both them and their employees. They may prioritize putting money back into their businesses over putting money away for their futures—potentially losing out on tax-deferred, compounding returns that can accumulate over time.

By failing to engage expert help, the small business owner may completely lack a retirement strategy, or may be making critical mistakes that could cost them in taxes and fees in the long run. A small business owner should consider having a bookkeeper, accountant, attorneys, bankers and a personal wealth management team available to provide advice.

While in theory it’s great to think that you will sell your business when you retire, you need to understand its real value and know that market conditions can affect its value adversely.

Clayton Alexander, president, Teton Wealth Group

Prepare

Expert Clayton Alexander details some common mistakes made by entrepreneurs when it comes to retirement planning. Read on for more retirement information, including ways to offer retirement plans to employees.


Cheers,
CO—

Thinking you will “sell the business” as your only retirement plan

According to the Exit Planning Institute, 70% to 80% of the businesses put on the market don’t sell, and 95% of mergers and acquisitions experts believe that business owners’ unrealistic idea of their company’s value is the biggest obstacle in a sale or transfer. Furthermore, 83% of owners have no written transition or succession plan, leaving their futures, their families and their employees unprotected.

While in theory it’s great to think that you will sell your business when you retire, you need to understand its real value and know that market conditions can affect its value adversely. You should have retirement savings held separately and have contingency plans in place should you lose someone important, like key-man insurance or other options. Furthermore, absolutely every agreement should be in writing, even when a business is family-owned and operated.

Failing to consider company structure and contribution limits

Business owners have more options than people who work for others when it comes to maximizing savings for retirement. You must plan comprehensively, taking into account your own personal goals, tax consequences and the need to attract and retain high-quality employees.

A few retirement plan options to consider are:

  • Solo 401(k), ideal for self-employed professionals with no employees, allowing a maximum contribution of up to $56,000 (under age 50) or $62,000 (age 50 and older) in 2019 depending on earnings and other limits.
  • SEP (Simplified Employee Pension) IRA, ideal for small business owners with no (or few) employees, allowing a maximum contribution of up to $56,000 in 2019.
  • Defined benefit plan, ideal for a self-employed person with no (or few) employees and a high income, with a maximum contribution of up to $225,000 in 2019, depending on an actuary’s calculations of what can be contributed.
  • SIMPLE IRA, ideal for small business owners with up to 100 employees, allowing maximum contribution of $13,000 in 2019, plus catch-up contributions of $3,000 for those 50+.
  • A traditional company 401(k), allowing a maximum contribution limit of $19,000 for workers under 50 and $25,000 for those age 50 and older in 2019.
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Clayton Alexander, president of Teton Wealth Group. — Clayton Alexander

Not knowing how Social Security, Medicare and other programs fit into your plans

While you can wait to file for Social Security, there is no reason to wait longer than age 70, because at that point benefits no longer accrue.

However, you may want to go ahead and file for Medicare at age 65, depending on whether or not you have a group health insurance plan covering more than 20 individuals. After you take Social Security, you can no longer contribute to a Health Savings Account (HSA), if you have one.

Failing to review your retirement plan annually

Tax rules change, your business changes, your life changes. Did you know that the beneficiaries that you name on your policies and accounts take precedence over your wills and trusts? And that if you pass away unexpectedly, your family members may be on the hook for business debt if you used personal assets as collateral? Take some time each year to review everything and then make the necessary changes.

CO— aims to bring you inspiration from leading respected experts. However, before making any business decision, you should consult a professional who can advise you based on your individual situation.

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Published February 07, 2020