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A Retirement Catch-Up Guide For Business Owners Thumbnail

A Retirement Catch-Up Guide For Business Owners

Al Lindsten

By Al Lindsten

Owning your own business can give you great freedom and power in life, but it also comes with great responsibility. One of the responsibilities business owners struggle with is creating a plan to convert their successful business into long-lasting personal wealth, namely retirement. 

As a business owner, you know how difficult it is to prioritize saving for retirement when you are focused on growing your business. Many small business owners invest personal savings into their business, and 34% of business owners don’t have a retirement savings plan. (1) This creates a dire situation as they draw closer to retirement and don’t have a nest egg to rely on. Since your retirement is just as important as the success of your business, take a look at these four steps that will help you catch up for retirement in a hurry.

1. Find The Right Plan For You

Unfortunately, you don’t have an employer-sponsored 401(k) account with matching contributions at your fingertips. That doesn’t mean you are out of luck when it comes to building a nest egg. Here are some savings options to consider.

Traditional IRA

A Traditional IRA is similar to a 401(k) in that you can contribute pre-tax dollars to an investment account that grows tax-deferred. For 2021, you can contribute up to $6,000, or if you’re over age 50, a total of $7,000.

Roth IRA

With a Roth IRA, your contributions are not tax-deductible like traditional IRAs. However, your earnings grow tax-deferred and your withdrawals are tax-exempt (subject to IRS guidelines). Like a traditional IRA, you can contribute up to $6,000, or if you’re over age 50, a total of $7,000. However, one caveat to the Roth is that there are income restrictions. (2) If your income surpasses the cutoff amount for a Roth IRA, you can still contribute to one through a backdoor Roth transaction.

SEP IRA

A SEP IRA, also known as a Simplified Employee Pension, is an IRA similar to a traditional IRA. As an employer of yourself, you can make contributions on your own behalf for your retirement. You can set up a SEP IRA in addition to a solo 401(k) and can contribute 25% of your self-employed income or $58,000 per year (whichever is the greater amount).

Solo 401(k)

A solo 401(k) is similar to a traditional 401(k) you’d contribute to as an employee. Funds invested within a solo 401(k) plan grow on a tax-deferred basis. The powerful feature of this plan is that you can contribute in two separate capacities, as an employee and as an employer. Wearing your employee hat, you can defer up to $19,500 (or $26,000 if age 50 or older). As the employer, you can also contribute up to 25% of compensation as defined by the plan. Combined, you can contribute up to $64,500 if you’re over the age of 50.

Adding A Defined Benefits Plan

In order to save more than what your IRA limits you to, you can set up a defined benefit plan. These plans have much higher tax-advantaged contribution limits and can be designed to fit the needs of almost any business. Depending on your age and income, a defined benefit plan allows you to set aside up to hundreds of thousands of dollars to fund your retirement, making it possible to save a lot, even if you have little time.

Ultimately, everyone’s situation is unique, so there’s no one right solution. However, for many people, it makes sense to contribute pre-tax and post-tax dollars to several different accounts. For example, along with a solo 401(k), you may also want to contribute to a Roth or SEP IRA.

2. Banish Debt

The less debt you have when you enter retirement, the better. Whether it’s personal debt in the form of credit cards, car loans, or a mortgage, or business debt in the form of bank loans or equipment purchases, reducing your debt before retiring will lower your monthly expenses and enable your savings to grow and last longer. Review all current debts you face and compare interest rates and balances. This can help you decide which to pay off first. 

3. Look Ahead To The Future

Do you have an exit plan? Even if you are just in the beginning stages of your business, it’s imperative to have a plan for the future of your company because it will likely become one of your largest assets. Around 78% of small business owners plan to sell their businesses to fund their retirement, with the sale profits funding 60-100% of their retirement needs. (3) If you are heavily relying on the sale or succession of your business to take care of your future financial needs, it’s critical that you start thinking about how and when you may want to leave your business and what you can do now to prepare so you receive the highest price possible. Having a strategic transition plan will make your company more appealing to buyers who want assurance that it will continue to thrive without you. Even if you’re passing the business on to family members, you need a plan in place to ensure that it continues to prosper and all family members are treated equally.

4. Build A Support Team

It’s no secret that being a business owner complicates life and finances. On top of saving for retirement and taking care of your family, you also have employees to think about and tax considerations. You are in a unique situation and would benefit from working with someone who specializes in serving business owners. 

At Shelton Financial Group, we specialize in serving small business owners and providing unique services to take care of all their financial needs. To learn more about how we can help you catch up for retirement in a hurry, reach out to us at 260-436-7006 or schedule your free 30-minute Fit Call online

About Shelton Financial Group

Shelton Financial Group is an independent, multi-generational firm in North East Indiana that takes a team approach to addressing their clients most pressing financial concerns. SFG was founded in 1996 with the mission of helping people enjoy their wealth. Using their proprietary “One Life Formula,” the team at SFG focuses on what matters most to their clients and what they can control, integrating their wealth management needs with other aspects of their financial picture. To learn more about Shelton Financial Group and how they can help you achieve financial independence, visit them online.

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(1) https://www.cnbc.com/2017/07/27/survey-34-percent-of-entrepreneurs-lack-retirement-savings-plan.html

(2) https://www.fidelity.com/retirement-ira/contribution-limits-deadlines#:~:text=Total%20annual%20contributions%20to%20your,%247%2C000%20(age%2050%20or%20older)

(3) https://www.pnc.com/insights/small-business/business-planning/selling-business-to-fund-retirement.html#:~:text=Few%20actually%20use%20it%20to,100%20percent%20of%20their%20retirement.