An adequate retirement takes planning.
Preparing for retirement can pose unique challenges for small business owners, from choosing the right plan to saving the proper amount. — Getty Images/Chaay_Tee

Regardless of their age or income level, many Americans struggle to set aside an adequate amount of money for their future retirement.

A 2019 Bankrate survey found that just 26% of U.S. workers are saving the recommended 10-20% (or more) of their income – and 21% aren't saving anything at all. Even more troubling is the fact that nearly 70% of American small business owners surveyed by Paychex report having little to no confidence that they'll be financially prepared to retire by age 65.

This statistic, while worrisome, isn't exactly surprising: Self-employed professionals have a lot on their plates, including financial obligations like business taxes and payroll, so saving for retirement often gets pushed down to the bottom of their priority list.

"Many small businesses are so intertwined with the daily activities of their business – serving customers, training employees, balancing budgets – that they don’t plan ahead for retirement," said Jesse Johnstone, president of Fibrenew. "They are left scrambling to figure out how to gracefully exit their own business, without just walking away from it."

The key to keeping your retirement on track is understanding the challenges you're likely to encounter as a business owner and creating a plan to face them. Here are a few common small business retirement challenges you might not be thinking about right now, and what you can do to prepare yourself.

Choosing the right type of retirement plan

Corporate employees are often able to take advantage of an employer-sponsored 401(k) plan to help them save for retirement. Small business owners are responsible for setting up their own retirement plan, which is typically an Individual Retirement Account (IRA).

There are a few different types of IRAs (as well as other retirement plan options for yourself and your employees), and the choice can be overwhelming. That's why Paul Miller, CPA and founder of Miller & Company, LLP, recommends speaking with a knowledgeable adviser to help you make the best decision for your business and your personal retirement goals.

"Ask someone you trust, such as your company’s CPA, to help you put together a budget and refer you to a reliable adviser," said Miller. "Questions to ask include: Is the plan flexible enough so in the 'good years' it can be overfunded, so that in down years, the minimum contribution can be made? Regarding employees, are they eligible as well?"

[Read: How to Offer an Employee Retirement Plan]

Understanding your true expenses now and in retirement will help inform what you need to invest to sustain your intended style of life.

Katie Prentke English, co-founder and CMO, Harness Wealth

Setting aside the right amount of income for your retirement

When you're trying to cover your personal expenses and the day-to-day expenses of running a business, contributing to retirement savings often becomes a matter of "whatever is left." You may decide on a certain dollar amount based on your current income level and continue contributing that amount for years on end. However, Katie Prentke English, co-founder and CMO at Harness Wealth, noted that retirement planning is an ongoing task, not a one-time activity.

"Contribution levels may need to be adjusted annually based on your company profits [and] investment strategies will need to change as you get closer to retirement," Prentke English told CO—. "If you are not … highly knowledgeable about financial planning, identifying a financial adviser you trust can help keep you on track."

Accounting for lifestyle changes

According to Prentke English, business ownership may enable you to cover some of your costs of living in a way that you might not be able to once you fully retire.

"Understanding your true expenses now and in retirement will help inform what you need to invest to sustain your intended style of life," said Prentke English.

Miller advised preparing thoroughly for the change in lifestyle you'll experience during retirement – or, ideally, avoid it entirely.

"It is possible to continue to live the way you do now into your golden years," Miller added. "The earlier you start retirement planning, the more likely you are to achieve certain goals, and the sacrifices made today will certainly benefit tomorrow."

Planning for your future exit

If you're decades away from retirement, you may be focused on growing your business so you can increase your revenue and keep reinvesting that money back into your company for the long term. However, it's important to keep your company's future owners in mind, too: According to Johnstone, the best way for an entrepreneur to retire successfully is to have a business that attracts buyers.

"The growth you make in revenue and in customers now can help as you prepare to sell your business in the future," he said. "It makes the transition to retirement feel much more like a vacation than a journey into the great unknown."

[Read: How to Create an Exit Plan for Your Business]

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 11, 2020