Planning an Entrepreneur's Retirement

By Thursday Bram on 19 March 2011 (Updated 19 April 2011) 1 comment

For many entrepreneurs, retirement is something to worry about down the road. Today, you've got enough on your plate; managing your business can easily occupy every spare moment you've got. But the sooner you can spend some time thinking about retirement, the better. Not only will you have more time to set aside savings for retirement, but you'll create more opportunities for yourself whether or not you actually retire on schedule.

Setting Aside Money for Retirement

While there are many ways running your own business differs from being an employee, the absence of a retirement plan can be a doozy. A 401(k) or similar retirement plan has become a fairly standard benefit for many employees. It makes the process of saving for retirement practically automatic — all an employee has to do is sign up for the program and a portion of their paycheck goes straight into the account. With payroll taxes and other deductions, some employees may not even notice. But the process is far more complex when you're on the other side of the equation. As a business owner, you have to take responsibility and actually do some retirement fund legwork if you want to have a retirement account.

There are a variety of tax-advantaged retirement savings plans available to business owners and the self-employed, which makes the process easier. Because of the tax advantages, it rarely makes more sense to invest money on your own for your retirement. However, every situation is different; you're going to have to do some research to find the solution that works for you. It can be tough to determine which plan helps you most in terms of taxes and which helps you most in terms of amassed retirement savings. Be sure to talk to a tax professional or a financial planner who can look at the specifics of your financial situation.

Your options include, but are not limited to:

  • Simple IRA: If you employ fewer than 100 people per year, you can choose a Simple IRA. With this plan, you can save up to $11,500 per year. You can also make a Simple IRA plan available to your employees and contribute to their accounts as a benefit. However, if you use a Simple IRA, your options for additional retirement plans are limited.
     
  • SEP IRA: Just like Simple IRAs, SEP IRAs are available to business owners and their employees. You can contribute up to 25 percent of an individual's compensation, provided that amount is under the cap of $49,000.
     
  • Simple 401(k): In most ways, Simple 401(k) plans are identical to Simple IRAs. However, with a Simple 401(k), an account holder can take a loan against the account balance, which is not allowed under a Simple IRA plan.
     
  • Single-participant 401(k): Provided that you don't have any employees, a single-participant 401(k) can be a good choice. It offers a higher limit for savings than a Simple IRA – up to $16,500 a year. You can also have your business make a tax-deductible contribution on your behalf of up to 25 percent of your compensation, with a ceiling of $49,000.

If you routinely work with an accountant or other financial professional to help you keep your business' affairs in order, that individual is likely the best starting point for determining what retirement plan is going to be the best choice for you and your business. After all, your business may wind up with additional financial and reporting obligations if you begin setting aside money in a retirement account. You don't want planning for the future to impact your company's present.

Making Your Business Your Retirement Account

Your business itself may provide for some or all of your retirement. When the time comes, you can sell the whole thing and use the proceeds to fund your ideal retirement. Or you can hire a manager to run the business while you continue to collect an income from it.

Or maybe you aren't excited about fully retiring from the company you've built over the years, but you recognize the fact that at some point you'll probably want to put in fewer hours each day. That means that you need to make sure that your business is ready for you to retire. Even if that day is a long time off, it's worth thinking about what your retirement is going to mean for your business. At the very least, consider what it's going to take for the business to run without you running it. No buyer will take on a business that absolutely requires the founder's presence — and most managers will be a little concerned about that prospect, too.

Even if you are considering this option, it's still a good idea to look at the formal retirement accounts discussed above. Having a retirement fund in place gives you more flexibility – your retirement does not depend solely on your ability to sell your business. By planning for your personal future as well as the future of your business, you'll simply have a little more security when retirement eventually does arrive.

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J

It can be very tough for an entrepreneur to leave the work force and their baby behind in someone else's hands. For some their business might have been their occupation for decades and to make that transition over to the new lifestyle can be strange for some.