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4 Retirement Challenges Small Business Owners Face

Saving for retirement can be tough, especially for small business owners. But you're even tougher. Here are four retirement challenges and how to approach them.

By Brett Fellows, CFP

Saving for retirement is a challenge for most Americans, but especially for business owners. They can find themselves unprepared for the future. SCORE, a mentoring organization that supports small business owners, notes that 34% of small business owners do not have retirement savings plans set up for themselves. Moreover, 40% of owners do not believe they will be able to retire by age 65.

Brett Fellows, CFP®, is the founder and president of Oak Capital Advisors in Charleston, South Carolina. As a small business owner and financial planner, Brett's expert insights help entrepreneurs successfully exit their businesses and plan for a financially secure retirement.

Brett Fellows

In addition, data from the SCORE survey showed that the smaller the business, the less likely it was able to offer a retirement plan to its employees. In fact, 72% of companies with ten employees or fewer do not offer retirement plans to their workers.

What are the primary issues small business owners tend to struggle with when it comes to planning for retirement?

1. Developing an Exit Strategy

Many business owners do not have an exit plan in place for when they retire. This oversight can be problematic since most businesses listed for sale never actually sell.

Instead, you should consider what you plan to do with your business when you eventually depart—long before that day comes. For example, can you transfer ownership to a family member or key employee? Or does it make sense to seek an outside buyer?

Your exit strategy can have a meaningful impact on your overall payout, tax consequences, and peace of mind. Therefore, it’s important to consider your financial goals, time horizon, and how much you want to be involved in the business long-term as you plan.

2. Making Retirement Planning a Priority

Your business may be your largest asset, but that doesn’t mean your business alone will fund your retirement. If you reinvest all available cash in your business, you may ultimately find yourself unprepared when you eventually stop working. In most cases, having separate savings is necessary to supplement your income in retirement.

A survey of small business owners indicated that 42% intend to retire by age 65 or older, 29% hope to retire between ages 55 and 64, and 19% plan to step down between ages 40 and 55. No matter at what age you plan to exit your business, you should estimate how much you’ll need to fund your retirement and set your savings targets accordingly.

3. Choosing the Right Retirement Plan

If your business doesn’t sponsor a retirement plan, there are a variety of qualified retirement accounts available for the self-employed. These include:

Traditional or Roth IRA

A traditional IRA allows the holder to make contributions tax-free. Taxes are deferred until savings are withdrawn upon retirement. One advantage of a traditional IRA is that earnings may grow faster since taxes are not deducted from the original investment.

In a Roth IRA, on the other hand, taxes are paid upfront. The benefit is that withdrawals can be made tax-free in retirement. However, not everyone is eligible to contribute to a Roth IRA based on their income. Be sure to consult a financial professional to determine which option makes the most sense for you.

Simplified Employee Pension (SEP)

A simplified employee pension (SEP) is an individual retirement account (IRA) that an employer or a self-employed person can establish. Contribution limits to a SEP IRA are often higher than for traditional IRAs.

Self-employed individuals can take a tax deduction for contributions made to a SEP IRA. In addition, employers can make contributions to eligible employees’ plans on a discretionary basis.

SIMPLE IRA

A SIMPLE IRA (Savings Incentive Match Plan for Employees) is a retirement savings plan that most small businesses with 100 or fewer employees can use. Unlike a SEP IRA, employees can contribute to their own plans. And, employers can choose to make a non-elective contribution of 2% of the employee's salary or match the employee's contributions to the plan dollar-for-dollar up to 3% of their salary.

Solo or Individual 401(k)

A 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 much the same as traditional 401(k)s offered by larger companies and employers.

4. Accounting for Lifestyle Changes

Understanding your lifestyle and expenses is essential for adequately preparing for retirement. If you don’t do so already, you may need to separate your personal expenses from your business expenses to come up with an accurate estimation.

If you’re not sure which expenses to include in your retirement plan, you can ask yourself the following questions:

  • Will you need to make a monthly mortgage payment? 
  • Do you plan to live in the same city or do you wish to move? 
  • Will there be any significant debts still outstanding at the time of retirement? 
  • Are there family members you may still need to support to some extent?

These are just a few examples of the expenses you may incur throughout retirement. However, working with a financial planner can help you estimate the true cost of retirement and develop a savings and investment plan to prepare accordingly.

Next Steps

No matter when you plan to retire, or the retirement savings plan you select to help you achieve your goals, it's important to have a strategy in place. The earlier you start planning, the better chance you’ll have of successfully exiting your business and retiring on your terms.

About the author: Brett Fellows, CFP®

Brett Fellows, CFP®, is the founder and president of Oak Capital Advisors in Charleston, South Carolina. As a small business owner and financial planner, Brett's expert insights help entrepreneurs successfully exit their businesses and plan for a financially secure retirement.