Small business owners use their entrepreneurship skills to juggle the day-to-day operations of their business, but their balancing act may leave them little time for planning for retirement. This life milestone is different for everyone, but it’s especially unique for small business owners. While most people who are anticipating retirement have savings plans sponsored by their company, the process may be more complex in the absence of such a plan. Small business owners must determine how to keep income flowing after retirement or how to capitalize off of their business by selling it and creating a nest egg. Pat O’Connell, senior vice president of the Ameriprise Advisor Group at Ameriprise Financial, shares these tips for small business owners.
1. Make your retirement part of your business plan. Planning and saving for retirement as a self-employed person is crucial to the financial future of yourself, your family and perhaps your business. Income and expenses at a small business can be unpredictable, but work to prioritize a consistent, systemized way of saving and evaluate your retirement goals on an annual basis. Determining what your retirement income should be is also an important step. Based on your goals for retirement, decide what you’ll need to withdraw monthly from your retirement accounts to make sure you’re on the right track.
2. Consider various investment tools. Think about saving in specialized retirement investment accounts like a 401(k), a Simplified Employee Pension (SEP), or a SIMPLE IRA that are unique to your goals and business plans. Strategic investments can also help plan for the unexpected – like a disability or sudden illness – that could take you away from the day-to-day management of your business for a period of time. Consider consulting with a financial advisor who can help you develop a plan and help you determine which investment strategies are best for your situation.
3. Develop a succession plan. It’s important to think about the future of the business that you’ve put so many resources into. Research the legal procedures for transferring ownership (to a family member or employee) and document in writing who you intend to take over your business after you’ve retired. There may be tax ramifications when you sell or transfer your business, so be aware of these so you can prepare for the financial impact.
4. Prepare to sell. If you intend to sell your business, be realistic about its value. It’s difficult to consider accepting less than you believe it’s worth, but if you retire in a down market or sooner than you’d planned, you may need to compromise on an offer. Keep in mind that selling your business may be emotional. Having knowledge about the process before you consider offers may make it less stressful and ensure the decisions you make are financially sound.
5. Ask for help. A sole proprietor with no employees can establish a retirement plan fairly easily after they’ve chosen which kind of investment is best. But if you want to maximize your retirement savings, a good way to keep savings goals on track is to rely on financial professionals who specialize in small business. Develop a network of professionals like an accountant, tax specialist and lawyer that might come in handy as you seek advice to build retirement savings independently of the business and perhaps develop a succession or sale plan.
As a business owner, you know you need to invest in your business in order to keep it viable. The same is true for your retirement. While your natural instinct may be to invest everything back into the business, also remember to pay yourself.