Don’t rely on your small business to provide for you in retirement

Retirement can loom like a dark cloud for small business owners. Many people put blood, sweat and tears—and every penny—into building their business, but never save for the future.

A huge number of entrepreneurs reported that they do not put aside retirement savings at all. For some, selling a business is the only way out of retirement.

It’s a risky bet, says Keith Hall, president and chief executive officer of the National Association of Self-Employed Persons.

“You put all your eggs in one basket. Not just your current lifestyle, but your future,” says Hall. “If something goes wrong, you sacrifice both.”

And the list of things that can go wrong is long: Your business could collapse. Your health may fail. You may not find a buyer. You may have to sell for less than you need to. You may not be able to fully retire.

Instead of gambling that everything will go right, diversify your nest egg to serve you well in your later years.

MAKE RETIREMENT PLANNING A PRIORITY

Saving for retirement is often the last item in your budget and the first to be cut in favor of other priorities, says Hall. Instead, make it as important as paying your mortgage or running your business.

This will not come naturally to most entrepreneurs, who are often overly focused on immediate needs and tend to plan in three- to five-year increments.

“It’s hard for an entrepreneur and small business owner to think about 20-odd years,” says Mary Bell Carlson, owner of Carlson Consulting LLC. “I often figure out what I need to do today for immediate cash and long-term profitability.”

But Carlson, a financial advisor and certified financial planner, emphasizes investing where she can. She and her husband contribute to his employer-provided retirement plan. They each also put money into individual retirement accounts, among other investments.

“My biggest lesson was to start, no matter how small the amount; it’s just important to start,” she says.

Determine what you can afford, whether it’s 1%, 5% or 10% of your gross income, and commit to it, says Hall. Over a long enough period, even small, regular contributions will add up to something meaningful.

There are a number of retirement plans for small business owners, each with requirements, provisions and tax implications.

  • TRADITIONAL, MOUTH OF IRA: Individual retirement accounts are easy to open and available to almost everyone. You can contribute up to $6,000 in 2022 (up to $7,000 if you’re 50 or older). The main difference between traditional and Roth IRAs is whether you want the tax savings now or later. Traditional IRAs use pre-tax income, but you pay taxes when the money comes in. With Roths, the opposite is true.
  • 401(K) ONLY: Available to business owners who do not have full-time employees (except spouse). The contribution limit is up to $61,000 for 2022, although it is split into two parts, each with limits. Similar to an employer-sponsored 401(k), contributions are pretax and withdrawals are taxable as income.
  • SEP IRA: A Simplified Employee Retirement IRA, or SEP IRA, works just like a traditional IRA, except you can contribute a lot more. Annual contributions are limited to $61,000 in 2022, versus $6,000 for a standard IRA. Another key difference: If you put money into your own SEP IRA, you must contribute an equal percentage to the employees. This option is best for sole proprietors or those with a small number of employees.
  • SIMPLE IRA: This option has a lower contribution limit, up to $14,000 in 2022 (for those under 50), but it offers accounts for employees and small businesses that are easier to manage than a traditional 401(k). You must offer a flat 3% or a total contribution of 2% for all employees. You can deduct contributions made to your account and contributions made on behalf of your employees.

GET PROFESSIONAL HELP

Of course, you can try to decipher which retirement plan is best for your business. Or you can work with a certified financial planner or registered investment advisor to determine the best path forward. Doing the latter can give you confidence in your strategy, help you avoid any costly fines, and ensure you don’t leave money on the table.

If selling is still part of your retirement plan, professional help is essential, says Norm Sherman, a certified mentor with SCORE, a national volunteer organization that offers free business mentoring. First, you need to know if your business is for sale and what you can realistically expect from the sale.

An investment banker or business broker can evaluate your revenue, profit margin, business structure and market to give you an honest appraisal and help you better position your business for a future sale.

“It costs you nothing to get the answers to these questions,” says Sherman. “Don’t act blindly; find experts who can help you.”

— Kelsey Sheehy, NerdWallet

The content is for educational and informational purposes and does not constitute investment advice. Kelsey Sheehy is a writer for NerdWallet. Email: [email protected]. Twitter: @kelseylsheehy.

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