Maximizing Your Retirement Savings as a Business Owner
When it comes to planning for retirement, business owners are in a unique position. Unlike regular employees who might have access to company-sponsored retirement plans, you, as an entrepreneur, may need to take extra steps to help ensure a comfortable and financially secure retirement. Balancing your personal retirement planning with the financial demands of running a business can be challenging, but it’s a critical part of being a successful entrepreneur. Let’s explore effective strategies to help maximize your retirement savings and ways to mitigate concentration risk, a unique pitfall for business owners.
Start Early with a Clear Financial Plan
The sooner you start saving for retirement, the better. Compounding interest can significantly increase your savings over time. When you start saving earlier, you may be able to afford to contribute less money each year to reach your retirement goals since compound interest is on your side. It may also provide you a buffer in case of business downturns or personal financial hardships.
Outline your financial goals. What kind of lifestyle do you envision? Consider all possible expenses, including housing, healthcare, travel, and hobbies. Don’t forget about inflation and possible unexpected costs. A financial planner can create a financial plan that provides a roadmap to help you achieve your goals.
Leverage Tax-Advantaged Retirement Plans
Several retirement plans are specifically designed for small business owners and self-employed individuals. These plans offer tax advantages that can help boost your retirement savings. We have previously talked about choosing the right retirement plan for your business.
Solo 401(k) Plans: These are designed for self-employed individuals with no employees other than their spouse. They offer high contribution limits – for 2023, you can contribute up to $22,500 as an employee plus 25% of your net self-employment income as an employer, up to a total of $66,000.
SEP IRAs: Simplified Employee Pension (SEP) IRAs are easy to set up and maintain. The employer contribution limit is 25% of the employee’s compensation up to $66,000 for 2023.
SIMPLE IRAs: Savings Incentive Match Plan for Employees (SIMPLE) IRAs are suitable for businesses with 100 or fewer employees. The employee contribution limit for 2023 is $15,500.
Defined Benefit Plans: These plans are often more complex and generally expensive to manage, but they allow for significantly higher contributions than other plans. Defined benefit plans are designed to provide a reliable income stream in retirement, which can be particularly beneficial for business owners who are closer to retirement age and want to ensure a certain level of financial security.
Diversify Your Investment Portfolio
Putting all your eggs in one basket – whether it’s your business or any other single investment – can be risky. Diversification is the key to help reduce this risk*. A well-diversified portfolio includes a variety of different types of investments, such as stocks, bonds, real estate, and potentially even alternative investments. The right mix for you will depend on your individual risk tolerance, investment time horizon, and financial goals.
*Diversification is a method used to help manage investment risk; it does not guarantee a profit or protect against investment loss.
Mitigate Concentration Risk
As a business owner, you may be exposed to concentration risk if a significant portion of your wealth is tied up in one asset: your business. If your business encounters financial difficulties or if the industry suffers, your personal wealth and retirement savings could be at risk.
How Do You Mitigate Concentration Risk?
Maintain a Diversified Portfolio: While it’s natural to have a substantial portion of your wealth in your business, it’s important to build other sources of wealth. Maintain a diversified investment portfolio and continue to add to it regularly.
Consider Selling a Portion of Your Business: If possible, consider selling a minority stake in your business to an investor or employees. This can provide you with immediate funds that you can invest elsewhere, diversifying your wealth.
Purchase Insurance: Various types of insurance can help to protect your wealth and business. Disability insurance, for example, can replace your income if you become unable to work. Business interruption insurance can protect your business income in the event of a disaster. This is all covered in our post about Protecting Your Business Financially Against the Unexpected.
Develop a Succession Plan: This involves creating a plan for someone to take over or sell your business if you retire, become disabled, or pass away. A well-thought-out succession plan can help protect your business and your family and preserve the value of your business for retirement.
Reinvest in Your Business Wisely
While it’s important to reinvest profits into your business to foster growth, it’s equally crucial to ensure those investments generate a good return. If your reinvestment is not yielding substantial growth or profitability, you might be better off diverting some of those funds to your retirement savings.
Plan for the Sale of Your Business
For many business owners, the ultimate retirement plan is to sell their business. If you’re considering this, start planning several years in advance. Enhance the aspects of your business that will be attractive to potential buyers, such as strong customer relationships, a competitive edge, and a solid financial track record. Also, consult with a business broker, lawyer, or accountant to help you value your business and navigate the sales process. Here are 5 Ways to Sell Your Business.
Hire a Financial Advisor
A financial advisor with experience working with business owners can provide invaluable help. They can assist with retirement planning, tax strategies, investment management, and risk mitigation.
It’s crucial to keep the lines of communication open with your financial advisor. Regular meetings will allow them to stay informed about your business and personal financial situation and adjust your plan as needed. They can also work with your other tax and legal professionals, such as your accountant and attorney, to ensure all your strategies are aligned.
Your retirement planning, as a business owner, involves unique challenges, including mitigating concentration risk. However, with early planning, regular saving, and strategic diversification, it can help you build a sizeable retirement nest egg while still growing your business. It’s your responsibility to take control of your retirement planning. Start today – your future self will thank you.
Securities offered through The O.N. Equity Sales Company, Member FINRA/SIPC, One Financial Way, Cincinnati, OH 45242 (513) 794-6794. Investment Advisory services offered through O.N. Investment Management Company.
If you’re a business owner and want to get started on your business valuation, please schedule a call with us. Connect here