What Do Small Business Owners Need to Know About Planning for Retirement?

You’ve always dreamed of owning your own business. You’ve got a terrific idea for making that dream come true, too. You’ve done the market research, created your mission statement, profiled your target customers, and sharpened your accounting skills.

That puts you in a great position to realize success, but don’t overlook one very important thing: Make sure you closely review and potentially adjust your financial plans for retirement so that they’re appropriate for you as the owner of a business instead of an employee of a company.

Unfortunately, one-third of small business owners don’t have a retirement savings plan, according to Manta, an online resource site for entrepreneurs. The reasons why vary: 37% don't make enough profit to open a retirement account; 21% used their retirement funds to start their business; and, 12% in each case either don’t plan to retire or (startlingly) don’t see the need to save for retirement. The rest hope to sell their business to take care of their retirement.

What finance moves should you be making to live out your golden years in comfort? Consider these steps to see which might be the right ones for you to take:

1. Figure Out What You’ll Need for Retirement

Even if your current circumstances make it difficult to start funding a retirement plan, you should at least try to gain some perspective on what you should be saving when you can start doing so. And you certainly should do the calculations now if you’re business is going well enough that you can already fund savings plans.

You can start getting an idea of things using any of a number of online calculation tools that take into consideration factors such as the age at which you want to retire, projected monthly living expenses, Social Security benefits, and taxes and inflation assumptions. They can give you a sense of how long your retirement savings will last. You can find a few here, here and here.

Of course, talking to a financial advisor is a great way to get more insight into how you can set yourself up to fund a comfortable retirement.

2. Be Smart About Your Exit Strategy

A big part of reaching retirement goals is putting in place a good exit strategy. Don't just assume you'll make a killing on an outright sale of your business on the open market or to another business. You have to take into account issues such as a downturn in your market that may keep buyers away just when you want to bow out.

So, while you can't necessarily count on this as a for-sure exit strategy to set up your retirement savings, there’s nothing wrong with keeping the option open. To that end, plan to regularly review your business valuation to stay apprised of what your business could potentially sell for. The business valuation method that’s usually used for businesses whose annual sales are under $1 million is Seller’s Discretionary Earnings (SDE), which is the Total Owner Benefit a business produces.

If your business has grown larger, you can consider implementing an Employee Stock Ownership Plan (ESOP). The ESOP is a there-when-you-need-it buyer of your company shares, and after-tax proceeds generally exceed that of when the sale is to an outside buyer. Plus, you can take advantage of the option to cash out little by little in order to make other investments to diversify your portfolio for retirement.

If you’re the only one with ownership in the business, you can’t sell your company but you can sell your assets.

3. Look to the Future of Your Partnership

If your business is a partnership, a buyout (Buy-Sell) agreement must be in place, setting out how the sale or buyout of your interest will be handled. These agreements generally specify events that can trigger a partner buyout, one of which is usually retirement. You can set this up at the time of forming a partnership as part of the agreement or as a separate legal document.

Buyout terms should include not just what the payment will be but how it will be distributed—lump sum or paid out in installments and in what form—cash, stocks, etc.

4. Start a Company-Sponsored Retirement Plan

It’s only natural for you to be hesitant about this because of the costs of your participation in funding 401Ks and the concern that you’ll have to put a lot of time into setup, maintenance, and compliance requirements.

But don’t write this off without considering the tax advantages. You can get a tax reduction by contributing to your employees’ accounts—and because you are your own employee, you get another tax reduction! Keep in mind that a 401K is one of the best options around to save for retirement, as your earnings grow tax-free to help you build wealth for when the day comes.

5. Rollover Your Employer-Sponsored 401K to a Solo 401K

Leaving your 401K in your former employer’s 401K plan isn’t always the right choice. You may not care for its investment options, for instance, or its fees are higher than you’d like. If you are a one-person business, an option to consider is a Solo 401K.

A traditional Solo 401K makes contributions tax-deductible the year you make them, so you have more money to save or invest on-hand to expand your retirement portfolio. A Roth Solo 401K allows you to take tax-free distributions in retirement, though you forfeit an initial tax break.

Also, under Solo plans, the IRS will allow a spouse that earns any income from your business to be covered, which can significantly raise your family contribution amount.

6. Set Up Your Own Pension Plan with a SEP IRA

Tax-deductible contributions and tax-deferred investments are the defining features of Simplified Employee Pension IRAs. Your money can grow tax-free in the years between setting up an SEP and retiring. You also can make much larger contributions to a SEP IRA than you can with a regular IRA.

7. Take the Same Steps Anyone Else Can to Protect Retirement

Reduce risk with a tax-diversification strategy, allocating assets among multiple investment accounts with different taxations, for example.

Or follow a smart withdrawal plan. You can take the strategy of withdrawing first from taxable accounts, then tax-deferred, and then tax-free accounts. Or, based on your situation, go with a proportional approach where you withdraw from all accounts based on that account’s percentage of your overall savings.

Starting up your own business may be the best move you’ve ever made. Now make sure that your next best move is securing your retirement.