How to navigate retirement as a small business owner

By Jazmin Goodwin, CNN Business

Running your own business can come with many perks, like setting your own work schedule and the potential to increase your income. But without the benefits typically offered by large employers, saving up for retirement is often solely up to you.

“When you are a small business owner, almost every part of your business is intertwined with your personal life. You are your business and your business is you,” said David Burton, a tax adviser at Harness Wealth.

Having a retirement plan in place and setting aside money early can ensure you have a solid financial cushion for when you make the decision to retire.

Here are four tips to help you prepare for retirement as a small business owner.

1. Assess your retirement needs

It’s important to figure out how much you’ll need to live comfortably in retirement.

Take into consideration factors such as your desired retirement age, projected living expenses and other important items including taxes, inflation and Social Security benefits.

Be sure to calculate for potential scenarios, like if you decide to sell the business or if you’re no longer generating business-related income.

Using financial tools such as a retirement calculator can help you evaluate your needs. You can also consult a financial professional that specializes in retirement planning.

Either way, getting a sense early on of how much money you’ll need can help you decide on the best retirement strategy to meet your financial goals.

2. Create an exit strategy

You will need to figure out what to do with your business when you retire. That includes having an exit strategy.

That could mean transferring ownership of the business to someone else, selling the business or holding an initial public offering. When deciding on an exit strategy, ask yourself how long you want to be a part of your business, how to best protect your business investments and what your financial circumstances and goals are.

“A lot of business owners don’t always think about what their exit plan or retirement plan is for their business. It’s never too early to be planning for that,” said Kristen Carlisle, general manager of Betterment 401(k).

In many cases, an exit strategy should be a part of your initial business plan and pitch.

3. Determine which retirement savings plan is right for you

Once you’ve gotten a sense of your retirement needs and have an exit strategy for your business, it’s time to determine what retirement savings plan is right for you.

Consider the plans’ contribution limits, the number of employees you have and the tax advantages that come with the type of account you decide on.

“No matter where you are in your business planning journey, it’s important for you to think about how to create a retirement plan for yourself. If you have employees, it’s also a really good idea to offer them a retirement benefit, so that they can feel financially supported and prepared,” said Carlisle.

Here are the five most common types of self-employed retirement plans:

Traditional or Roth IRA

• A traditional or Roth IRA is a retirement savings account that comes with tax breaks. With a traditional IRA, you pay taxes on your money only after you make withdrawals in retirement. Since taxes are deferred, your investment gains have the potential to grow faster. Traditional IRAs can either be deductible or non-deductible. A deductible IRA allows you to deduct your contributions on your tax return, while a nondeductible IRA does not. With a Roth IRA, you pay taxes on the money you contribute upfront, allowing your money to grow tax-free and at the time of retirement you pay no taxes. You or your employees can set up and contribute to their own IRAs. Old 401(k)s from a previous job can also be rolled over into an IRA.

SEP (Simplified Employee Pension)

• A SEP IRA is a type of tax-deductible account for self-employed individuals or small business owners — this can also include anyone with freelance income. SEPs function like traditional IRAs in that the contributions are not taxable until they’re withdrawn. This type of account can either be set up by an employer or self-employed individual and allows the employer to make contributions to their employees’ accounts. They offer a higher contribution limit that can be made in addition to traditional or Roth IRA contributions.

SIMPLE IRA (Savings Investment Match Plan for Employees)

• A SIMPLE IRA is another type of tax-deductible account for self-employed individuals or small business owners. Unike SEP IRAs, employees are able to make contributions, not just the employer. SIMPLE IRAs also require that the employer make either a dollar-for-dollar match of up to 3% of an employee’s salary or a flat 2% of pay, whether the employee contributes or not.

Solo or Individual 401(k)

• The solo 401(k) is an individual 401(k) for a self-employed individual or small business owner with no employees. Solo 401(k)s work the same as traditional 401(k)s offered by larger companies and employers. They come in both a traditional and Roth variety, just like IRAs. Contributions can be split between the two.

Defined benefit

• A defined benefit plan is a type of retirement account sponsored by the employer, such as a pension. The employer decides on a set payout when you retire based on factors such as salary and tenure at the company. When you retire, you can either opt for a lump-sum payment or a monthly “annuity” payment.

4. Make retirement planning a priority

It can sometimes be easy to get caught up in the day-to-day operations of keeping your small business afloat. But no matter what, don’t make the mistake of neglecting retirement benefits for you or your employees, Carlisle said.

“Make sure that you are thinking about your own future, the future of your employees, no matter what size your organization is,” she said. “You don’t have to start big, you can start small and grow from there, just as long as you’re not ignoring the benefit.”

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