Managing revenue, expenses, and taxes for a small business can be complicated enough, but what about saving for your own retirement, too? Unless you have a sizable pension from a spouse or an inheritance coming in your future, you need to make sure you’re saving as much as possible for retirement.
Of course, being a small business owner without easy access to an employer-provided 401(k) plan can be frustrating. But, there are other, comparable ways to save for retirement beyond the traditional or Roth IRA options.
To ensure you meet your retirement savings goals, here’s everything you need to know about planning intelligently for retirement as a small business owner.
Plan For Retirement as a Small Business Owner
Decide How Much to Save Each Month
The general rule of thumb states that you should strive to put 15% of your monthly paycheck towards retirement savings. Naturally this may not be possible for some folks, especially if your income is irregular or you’re having a tough year financially.
If you can’t manage 15% of your monthly paycheck and still have enough money for non-discretionary expenses, then now is the best time to review your own budget, trim expenses where you can, and start saving for retirement anyway.
Open an SBO-Solo 401(k) Account
Also known as a “self-employed 401(k),” “individual(k),” or “solo 401(k),” an SBO 401(k) is an independent 401(k) plan that offers pre-tax retirement savings options to small business owners. Whether you’re classified as a sole proprietorship, partnership, corporation or LLC, you qualify for an SBO 401(k) as long as you’re the owner of the company.
With an SBO 401(k), your maximum contribution for an elective deferral is $18,500/year, with catch-up contributions for 50+ year-olds maxing out at $6,000. The maximum employer contributions maxes out at 25% of compensation, or 20% for sole proprietors and Schedule C taxpayers.
The SBO 401(k) option is ideal for small business owners with incomes less than $220,000/year because you can contribute significantly more to your account in comparison to SEP IRAs.
Start a SEP IRA
If an SBO 401(k) isn’t right for your situation for whatever reason, then a SEP IRA is another great option available to small business owners striving to maximize their retirement savings.
SEP stands for “simplified employee pension,” and this type of retirement savings account lets you contribute tax-deductible funds up to 25% of your annual income or $53,000, whichever is less.
Whether you’re a small business owner or a freelancer, you likely qualify for the SEP IRA. You can also make contributions to employees’ retirement accounts, if you have anyone working for your small business. As a note however, you do need to pay taxes on withdrawals later on, unlike traditional and Roth IRAs.
Follow the Rule of 100
How do you figure out what an appropriate level of risk is for your investment strategy? One simple solution involves the Rule of 100, which has you subtract your age from 100 and the remaining amount is what you should allocate into more aggressive investments.
For instance, if you’re 35 years old, then 35% of your portfolio should comprise of conservative investment options like bonds and mutual funds, while the remaining 65% could be allocated into investments with higher potential for good returns.
The Rule of 100 doesn’t emphasize your personal tolerance for risk as much as the role of your age in determining how you should balance out your portfolio. Younger business owners with many years of working ahead of them can afford to invest in riskier options. They have comparatively more time to recoup losses in the event of a market downturn.
Be sure to keep this in mind when you’re adjusting your retirement saving strategy as you get older!
Have a Life Insurance Policy
Another effective way to save for retirement is by taking out a life insurance policy while you’re young and maintaining it when you get older. Life insurance is incredibly useful for protecting spouses and dependents from financial upheaval in the unfortunate event of your early demise.
This is also crucial for working spouses who are married to small business owners. You won’t be able to run your business efficiently if you have to cope with the potential loss of your loved one.
Understandably, life insurance is a tricky subject for anyone to think about or discuss with others because it requires you to consider the possibility of dying early. However, taking out a good life insurance policy and planning for all aspects of your future is critically important for anyone, especially small business owners who have employees, dependents, and clients relying on them for goods, services, and/or income.
Are You Efficiently Saving for Retirement?
One of the biggest mistakes small business owners make while saving for retirement is prioritizing business expansion over their future nest eggs. It’s certainly difficult having to balance entrepreneurial growth and your own financial future. But, by taking the aforementioned steps, you’ll be able to enjoy the fruits of your labor as a hard-working small business owner without sacrificing your long-term financial goal of retiring with a well-funded nest egg.