4 Ways Business Owners Can Catch Up for Retirement in a Hurry

When you own a business, it can often feel like one of your children—you work hard, nurturing it to grow, succeed, and benefit society. This understandable attachment creates an emotional investment that can make it difficult to find a balance between prioritizing personal finances and your business. For instance, business owners commonly face the struggle of creating a plan to convert their successful business into long-lasting personal wealth, namely retirement. Many small business owners invest personal savings into their business, and 34% of business owners don’t have a retirement savings plan, (1) which results in a dire situation as they draw closer to retirement without a nest egg. 

Don’t forget: your retirement is just as important as the success of your business! Let’s discuss four steps to help you catch up for retirement in a hurry.

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.

A traditional IRA is similar to a 401(k) in that you can contribute pre-tax dollars (subject to IRS guidelines) 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.

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)

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 and contribute 25% of your self-employed income or $58,000 per year (whichever is the lesser amount).

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.

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. The older the owner and the higher the compensation they have (up to IRS compensation limits), the larger the contribution allowed the owner. Defined Benefit Plans are not subject to the 25% employer deduction or participant contribution limitations. Be aware, these plans can be expensive to set-up and maintain.

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.

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. 

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. Equally important is having a plan for retirement that incorporates the expected proceeds or income stream from the sale of your business. 

There’s no avoiding it; owning a business complicates life and finances (again, just like having children!). In addition to saving for retirement and taking care of your family, you also have employees to think about and tax considerations. Given your unique situation, you would benefit from working with someone who specializes in serving business owners and who can bring an experienced, objective perspective to the table. 

We at Parkwoods Wealth Partners we fit that bill! Specializing in serving small business owners and tailoring our services to address clients’ specific financial needs, we pride ourselves on being good listeners and providing clarity and confidence to help you secure your retirement and live your best life. 

Jeff Campbell is a Wealth Advisor with Parkwoods Wealth Partners, a financial planning firm committed to providing services and advice that puts you, your family, and your values and goals first. With 25 years of experience in the financial industry, Jeff is passionate about building relationships with his clients, coaching them to make solid financial decisions and guiding them as they work toward the financial future of their dreams. He is known for being a good listener and providing clarity and confidence as he helps business owners secure their retirement and live their best life. Jeff has a bachelor’s degree in Economics from the University of Richmond. When he’s not working, Jeff loves spending time with his wife, Caitlin, his two children, Paige and Colin, and his extended family. He enjoys golfing, traveling, playing the guitar, and seeing live music. To learn more about Jeff, connect with him on LinkedIn.

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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.irs.gov/retirement-plans/amount-of-roth-ira-contributions-that-you-can-make-for-2021

(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

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