When you're self-employed, it's easy to let retirement planning fall to the wayside. You may not have enough funds to contribute to personal accounts, or you might use your accounts to fund your startup. However, the longer you put it off, the harder it'll be to catch up.
Your planning process should relate to your stage of entrepreneurship, include a mix of funding options, and be vetted by a financial advisor. In addition, knowing if you want to sell the business, close it or pass it to another person are things you should consider from the beginning. Here are four ways to ensure you're taking the right measures.
Base activities on your stage of self-employment
Undoubtedly, there's a difference between how you think about retirement when you're just starting as an entrepreneur compared to running your company for decades. One of the biggest mistakes a new business owner can make is to avoid long-term planning. Likewise, you're often juggling personal and professional choices in later years, which can feel overwhelming.
Here are crucial things to consider at each stage:
- Early: The first step for many entrepreneurs is rolling over any accounts from previous jobs. Next, outline a five-year savings plan that gradually increases your retirement contributions.
- Mid: After you've been in business for 10 or 15 years, you should have a nest egg and focus on maximizing your contribution limits. This is also an excellent time to itemize your assets and determine how they fit in your overall savings.
- Late: As you near retirement, it's essential to prep your business. This may include increasing its value, assessing the market and identifying potential buyers. You'll also want to decide how to communicate effectively with long-term clients.
Work with a financial advisor
A financial advisor helps you plan for and overcome unexpected retirement challenges. They also work with you to strengthen the financial health of your company. During the startup phase, a financial consultant helps optimize your initial capital investment, assess your business model's viability and outline profitability strategies.
Over time, financial professionals keep an eye on your personal and business accounts and coordinate them for optimal cash flow, tax strategies and investment purposes. Advisors can identify problems and prevent money mismanagement.
An advisory team is also vital to business succession planning. Members of such a team bring a perspective untainted by emotions and offer insights into potential market disruptions and new regulatory requirements.
Do you plan to sell your business or transfer leadership? These objectives require different preparation.
Pick the right mix of retirement savings funds
Tax-deferred and tax-free accounts fund your retirement. There are excellent options for solopreneurs and employers with one or more employees. Unfortunately, SCORE reported that "34% of small business owners do not have retirement savings plans for themselves." Even if you start small with minimal contributions, opening one or more retirement accounts is beneficial. Plus, you can avoid retirement pitfalls by automating your account funding.
The four main long-term financial accounts for entrepreneurs include:
- Traditional IRA: An individual retirement account (IRA) is the easiest to set up and use, as you can handle nearly everything online. Contributions are tax deductible, making a traditional IRA a smart strategy for lowering taxes.
- Roth IRA: Unlike a traditional IRA, you fund a Roth IRA with pretax dollars. Since you pay taxes when you're likely earning less money, your overall tax burden can be lower when you retire.
- SEP IRAs: A simplified employee pension (SEP) IRA is when your company contributes to your IRA on your behalf. You can add up to 25% of your compensation. The caveat is that if you have employees, you'll need to use the same investment rate for them.
- Individual 401(k): A solo 401(k) can be pretax (traditional) or post-tax (Roth-style). It has higher contribution limits than IRAs and can be converted into a normal 401(k) if you add employees.
[Read more: Here's What the SECURE Act Means for Small Business 401(k)s]
Develop an exit strategy
Do you plan to sell your business or transfer leadership? These objectives require different preparation. According to SCORE, 18% of small business owners "plan to sell their business to fund their retirement." Before selling your business, you'll want to increase its value and get your financial documents in order.
In comparison, business succession planning involves shifting responsibilities to new leaders and focuses on preparation, mentoring and training.
[Read more: Ready to Move On? How to Create an Exit Plan for Your Business]
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