Small Business Brief

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Planning for Retirement: 5 Things Small Business Owners Should Know

Small business owners wear many hats in an effort to keep their business afloat. Unfortunately, many of them do not have any solid plans for retirement. Don’t worry! Here are 5 things that all business owners should know about planning for retirement, as well as tips for choosing the right retirement plans.

Did you know that one in three Americans has nothing saved for retirement?

You may also find it startling that the average 50-year-old only has $60,000 saved up for retirement. While this is still better than nothing, it’s certainly not enough to live off of without any other income.

Some professionals are fortunate enough to be able to depend on pensions. Many others have secure jobs and employers who provide 401k plans.

But small business owners don’t have the safety blanket of pensions or employer-sponsored 401k’s. Instead, they have to fend for themselves and come up with their own retirement.

That’s not to say retiring as a small business owner is impossible! There’s tons of potential for a small business owner to retire comfortably. And knowing how to get to that point is key.

If you’re a small business owner and haven’t planned for retirement, it’s never too late to start! In this article, we’ll cover 10 things you should know about retirement as a small business owner.

Let’s get started!

1. The Problem with “The Business Is the Retirement” Ideology

For a lot of business owners, they see their brick-and-mortar as their retirement. Many plan to pass down the business to their children and receive a share of the company in return. Others plan to sell the business and live off what they make doing that.

These are all viable options for when it’s time to throw the towel in. But this retirement plan alone is a dangerous gamble. It weighs heavily on how successful a business is and how successful it will be years from now.

And there’s no way to know where a business will be or how valuable it will be in the future.

Don’t Wait to Plan for Retirement

A lot of small businesses saw this method of retirement planning work against them with the emergence of e-commerce. Thirty years ago, businesses owners could have never predicted Amazon or Shopify. Even some industries have died out almost entirely.

If there will always be a need for your business, and if it can sustain competition and the evolving market, the odds might be in your favor. But if you can’t say for certain where your business will be in the future, it’s important to have a plan B… and even a plan C.

2. Why Aren’t Entrepreneurs Saving Enough?

It’s not that small business owners are blowing their savings on fancy cars and vacations. A lot of them are actually putting a large percentage of their profits back into the business. And in turn, they’re leaving themselves with little to nothing.

Some entrepreneurs even low-ball the value of their company. This has a lot to do with how modest a person is. But it could be that many entrepreneurs are recycling more money into their businesses than what’s necessary.

Write Yourself a Paycheck

For most entrepreneurs, the majority of their wealth is already in the business. Turning that wealth into tangible retirement money can get tricky. But it’s not impossible.

The first step is simple and involves determining your personal income. Calculate how much you would pay someone to run the businesses exactly how you do. You may not actually give yourself this money – but you should start.

Of course, if the business can’t run on its own, you may not be able to pay yourself. But you should make it your goal to be successful enough to do this.

3. Ballpark Estimate What You Need for Retirement

Knowing your personal income is important for a lot of reasons. But for retirement planning, it can help you determine how much you’ll need to save up.

There are online calculators to help people get an idea of what they’ll need for retirement. There are even some people who still believe everyone should aim to retire with $1 million in the bank.

But only if it were all that simple. So, why do you really need to factor in your income when calculating how much you’ll need for retirement?

When calculating, think of it as determining an income replacement rate. Yes, it should be a sum of money. But you should look at it as a sum of money that functions as a monthly take-home pay.

Some financial advisers suggest that people should retire with a 70-80% replacement rate. This means that someone who makes $100,000 a year should retire with an annual income replacement of $70,000. That’s $70,000 of income per year after retirement!

Factor in Your Living & Dream Expenses

Chances are you won’t need the full 70-80%. But there are still several expenses to take into the equation.

You’re probably accustomed to paying out-of-pocket for your health insurance. It’s likely you’ll have to continue to do so after retirement. You should anticipate higher healthcare costs, as well.

Perhaps you plan to continue living in your home after you’ve paid off the mortgage. In this case, you won’t need as much in a monthly take-home rate. But if you plan to relocate to a place with a higher cost of living, you’ll need more in savings.

Do you have a spouse or other dependents you’ll need to take care of? Can you save more money on transportation once you retire? How much will you need saved up for annual taxes?

Retirement planning should factor in all these things. But this is also a good time to envision what you want your life to look like after retirement – and how you’ll fund it.

4. Choose a Retirement Plan

Just because you’re your own boss doesn’t mean you can’t set up a (401)K or IRA plan. It’s possible to open and administer your own for a minimal cost.

You do have options when it comes to a self-employed 401k plan or IRA. Which one you choose will depend on the nature of your business. We’ve outlined your options to give you a better idea of what you’re eligible for.

Solo 401k

Are you a one-man shop without employees? Have you always been self-employed?

If so, you may be eligible for a solo 401k plan. Each tax year, you can contribute a certain amount of money to this plan – before taxes!

As of 2018, self-employers can contribute up to 25% of their compensation in a solo 401k. But there are limitations to this.

If you were to go this route, you wouldn’t be able to contribute more than $55,000 to the solo 401k per tax year. This cap has increased every year and will likely continue to.

But if you’re over the age of 50 and set up a solo 401k, you may be able to make catch-up contributions.


A traditional IRA allows someone to contribute money into a plan without taxation. But once the individual retires, the withdrawals get taxed as income.

A Simplified Employee Pension (SEP) IRA works in a similar way. The contributions are also tax deductible. But you have to first qualify for a SEP-IRA.

The age minimum for starting a SEP-IRA is 21. The entrepreneur needs to have been in business for at least 3 years. And the amount that someone can contribute is 25% of their compensation.

Simple IRA or 401k

Does your business have less than 100 employees? If so, you may be eligible for a simple 401k or IRA.

Like a traditional IRA, a simple IRA is tax deductible. Under a simple IRA, you and each of your employees can contribute no more than $12,500 per year. Employees aged over 50 can also make catch-up contributions worth up to $3,000 on top of $12,500.

A simple 401k also applies to businesses that have 100 employees or less. An employer and their employees can each contribute up to $12,500 each year. Like a simple IRA, employees over the age of 50 can also make catch-up contributions worth up to $3,000.

You may be wondering what the difference is between a simple IRA and a simple 401k. The main difference is that employers can match employee contributions in a simple 401k.

They cannot do this with a simple IRA. Banks, brokers, and insurance companies typically provide IRA’s.

Which Retirement Plan Is Right for You?

Choosing between a self-employed 401k plan and an IRA boils down to how many people you have employed. But there is still a lot to take into consideration when choosing.

As a small business owner, you probably have a strong grasp of how finances work. But navigating retirement planning is by no means easy. It’s also harder to do when you have to take employees into consideration.

Consult with a financial adviser who specializes in self-directed retirement plans. With their help, you can learn more about which retirement plans you may be eligible for.

5. Make Saving Money a Priority

It’s hard to think seriously about the next 20 to 30 years. It’s easy to say you’ll start planning for the future “next year”.

But before you know it, you’ll be close to retirement age. And realizing that you’ve saved little to nothing for retirement is an awful feeling.

You may feel crippled by student debt or other loans right now. But that doesn’t mean you can’t refinance and make saving some retirement a priority. It also doesn’t mean you can’t maximize your tax deductions.

You can also save a little more each month by living frugally. Anywhere you can reduce unnecessary expenses, try it. You may be able to save more money each month than you realize.

How Small Business Owners Can Save More for Retirement

Small business owners may not have the luxury of looking forward to a pension in retirement. Nor do they have the convenience of an automatic 401k, like some professionals do.

But there’s a lot to enjoy about running your own company that many people envy. You have more autonomy and flexibility. And you also have great potential to retire more than comfortably.

How your business performs now can indicate much of your future success – even in retirement.

To reach your full potential, check out more of the Small Business Brief Blog!