If you're like many small business owners, you pour your heart and soul into running your business—and likely most of your time, too. That dedication is great for your business, but it can make it more challenging to plan and save for retirement or even to think about a strategy for potentially stepping back from the business one day.
Even if you never want to retire, it's essential to save for the future and plan for a possible business transition. At some point, you may decide to pull back on time you spend with your business, and you want to make sure you have adequate funds to take care of yourself. You also don't want to rely on family or friends to help financially. Thinking about how to set up a retirement plan for your small business is therefore critical.
Another great reason to start planning for retirement now as a small business owner—and sticking with it—is the compound effect regular investing can have in a retirement account. You could end up with a nice nest egg if you decide to retire. Money saved can help pay for your living expenses, travel, medical expenses and even costs like helping grown children with a down payment for a house.
How Small Business Owners Can Start Retirement Planning
From cutting paychecks to ordering merchandise to marketing, it can be easy to get distracted by day-to-day tasks and put retirement planning on the back burner. And while your company is likely first and foremost in your mind, you also have to think about yourself and your loved ones. You want your company to grow and thrive. But your personal financial success, and that of your family's, is also important.
As you research retirement planning for small business owners and think about how to set up a retirement plan, consider these factors:
Don’t Put Off Planning for the Future
It can be tempting to postpone planning for retirement or investing for other long-term goals because your small business takes up the bulk of your time and energy. That’s understandable but putting this step at the bottom of your to-do list means you’ll lose valuable time during which your money could be growing.
What if you're a solo business owner working for yourself or through side gigs? You should know that retirement planning for small business owners still applies to you because you can set up and save through a SEP IRA, as well as through an individual 401(k) or with traditional and Roth IRAs.
Understand Your Investment Options
The next question to ask yourself when thinking about how to set up a retirement plan for your small business is how you should choose the products you invest in for retirement. Asset allocation funds invest in other mutual funds rather than in individual stocks and bonds. They offer professional money management in one convenient package and may help you balance risk by using multiple underlying funds to provide diversification.
Two common asset allocation options are risk-based portfolios, in which you choose a fund based on how much risk you want to take, and target-date portfolios, in which you can select a fund based on the year you will need the money, such as your target retirement date. A target-date fund's investments become more conservative as the date nears.
When you open your retirement plan, it's a good idea to set up automatic payments to your accounts. Investing regularly on a schedule can let you buy more shares when prices are lower and fewer shares when prices are high. Just as important, it can help avoid knee-jerk reactions to market volatility.
Build a Business Exit Strategy, Retirement or Not
If you can sell your business one day, you may rightly view your business as a retirement asset. Selling the business could help fund your life in retirement or create a nest egg you can pass down to loved ones.
Even so, it's crucial to have a plan for exiting your business, whether it's through a sale or another option. Without a plan, you or your family members may be forced to exit suddenly, possibly selling at a discount. If you're planning on passing the business down to children or other relatives, it's still important to build a plan to help that transition go smoothly.
Even if you plan to keep working forever, it's still important to know how to set up a retirement plan for a small business and to save for retirement. Health or other considerations could force you to stop working. And as we recently saw with the COVID-19 pandemic, events outside your control can upend the trajectory of a whole industry.
Why is all this planning necessary? Consider what would happen if you're approached by a possible buyer for your small business. How would you react? And what would be the right price for you to be willing to sell? Creating an exit plan in advance can help you respond thoughtfully to all possibilities.
That said, retirement planning for small business owners or coming up with an exit strategy can be complicated. And the right plan for you will depend on your individual situation and wishes. You don't have to go it alone; you may want to work with a financial professional. That decision is important, and finding the right professional is even more significant.
When you think about how much to save for retirement as a small business owner and consider working with a financial consultant, look for someone who has experience working with companies of all sizes.
A trusted financial advisor can help take the guesswork out of how to set up a retirement plan for your small business. They can also help you figure out how much money you need to set aside. Another positive? An advisor can help you have the best plan and investments in place for you, your family and your company's future.
IRS Circular 230 Disclosure: American Century Companies, Inc. and its affiliates do not provide tax advice. Accordingly, any discussion of U.S. tax matters contained herein (including any attachments) is not intended or written to be used, and cannot be used, in connection with the promotion, marketing or recommendation by anyone unaffiliated with American Century Companies, Inc. of any of the matters addressed herein or for the purpose of avoiding U.S. tax-related penalties.
This information is for educational purposes only and is not intended as tax advice. Please consult your tax advisor for more detailed information or for advice regarding your individual situation.
Diversification does not assure a profit nor does it protect against loss of principal.
Investment return and principal value of security investments will fluctuate. The value at the time of redemption may be more or less than the original cost. Past performance is no guarantee of future results.
This material has been prepared for educational purposes only. It is not intended to provide, and should not be relied upon for, investment, accounting, legal or tax advice.
You could lose money by investing in a mutual fund, even if through your employer's plan or an IRA. An investment in a mutual fund is not insured or guaranteed by the Federal Deposit Insurance Corporation or any other government agency.
Dollar cost averaging does not ensure a profit or protect against a loss in declining markets. This investment strategy involves continuous investment in securities, regardless of fluctuating price levels. An investor should consider his or her financial ability to continue purchases in periods of low or fluctuating price levels.