5 Retirement Planning Activities for Small Business Owners

As a small business owner, you’ve worked hard to create a successful enterprise. While it can feel challenging to set aside money for retirement while running a successful business, when you reach the golden retirement age, you’ll be glad you did. Consider the following five retirement planning activities for small business owners.

1. Invest outside of your business. Your business is your livelihood today, but there’s no guarantee it will continue to generate income into your retirement. Like other investors, small business owners should consider diversification. For them, it’s also critical to invest outside their business to grow retirement savings. Ideally, your net worth will be spread over a variety of investments that are in line with your time horizon and risk tolerance instead of solely coming from your business assets.

2. Save with a tax-advantaged retirement plan. Small business owners can choose from several different retirement plans according to their needs. The 401(k) is the most common option for small businesses and features important plan design options such as penalty-free withdrawals in the event of an emergency and higher contribution limits compared to other retirement plans. There’s also a 401(k) that’s especially designed for the sole proprietor. Most 401(k) plans allow catch-up contributions, an especially important feature for entrepreneurs who are late to the retirement savings scene. One of the downsides of the 401(k) can be the paperwork. If you prefer less IRS reporting and will accept fewer options, look into a Simplified Employee Pension (SEP) or Savings Incentive Match Plan for Employees (SIMPLE) to start saving for the future. There’s also the traditional IRA, where taxes are deferred until retirement and the Roth IRA, which is taxed up front, so owners can withdraw funds in retirement tax-free if they have met all the rules.

3. Leave your retirement money alone. It’s not unusual for small business profits to fluctuate from year to year, creating inconsistencies in your annual income. If you’re serious about retirement savings, resist the temptation to dip into your retirement funds even when your business isn’t performing up to expectations. A retirement nest egg that’s left alone can benefit from compound growth, potentially helping you reach your goal sooner.

4. Create an exit strategy. Because you’re arguably the most valuable asset in your business, it’s important to plan for the day when you’re no longer at the helm. Do you have an employee or adult child capable of stepping in to run your business? Will you be able to sell your business at an attractive price to fund your retirement? You’ll want to make plans that include assigning a successor or documenting the business value to facilitate a sale if others will be counting on your business to be there, even when you’re not.

5. Work with a professional. You’re an entrepreneur, so you’re accustomed to wearing many hats. Yet when it comes to retirement planning, it’s wise to consult financial professionals rather than going it alone. A financial planner can help you project what you’ll need for a comfortable retirement and help you devise strategies to reach your goals. If you plan to sell your business one day, consult a business broker for market valuation assistance. Turning to other professionals for retirement and business succession planning also will free up your time to focus on your company.

Rob Davis lives in University Place with his wife Lorri and sons Wesley and Parker. He is a Financial Advisor and CERTIFIED FINANCIAL PLANNER practitioner™ with Ameriprise Financial Services, Inc. in Tacoma, Washington. Rob specializes in fee-based financial planning and asset management strategies and has been in practice for 37 years. He is licensed/registered to do business with U.S. residents only in the states of Washington, Idaho, Arizona and California. You may contact Rob at ameripriseadvisors.com/robert.g.davis.

Ameriprise Financial, Inc. and its affiliates do not offer tax or legal advice. Consumers should consult with their tax advisor or attorney regarding their specific situation.

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