Balancing the demands of running a brand can often leave planning for retirement on the back burner for small business owners. Unlike employees with traditional employer-sponsored plans, you’re responsible for creating your own nest egg. This means minimizing reliance on your company to support you in your golden years and diversifying your income.
Settle Your Debts
The long-term financial implications of debt can significantly impede your ability to save for retirement. Carrying these loans will degrade your quality of life. This is why it’s best to create a debt repayment plan to settle all business — and sometimes personal — loans before you retire.
Every dollar you allocate to debt servicing is a dollar diverted from potential investment or savings. High levels of debt — particularly those with variable interest rates — severely impact cash flow. Most brand owners prioritize debt repayment over retirement contributions, diminishing retirement savings potential.
There’s also the pressure to draw excessively from your retirement account to cover shortfalls. This is not advisable, as it reduces your savings and incurs penalties for early withdrawal. If you’re close to retirement age, you might be unable to rebuild your account in time for a stress-free retirement.
Begin by categorizing your debts based on interest rates and urgency. Clear time-sensitive, short-term loans first to avoid incurring penalties. Then, focus on high-interest ones such as credit card balances before paying off low-interest debts or loans from friends and family.
Consider options like debt consolidation to make your repayment plan more realistic and easily achievable. Leverage surplus corporate profits or cut back non-essential expenses to accelerate debt clearance.
Build a Retirement Savings Habit
Several retirement savings plans are tailored specifically for people with businesses. Accounts, such as a SEP IRA, Solo 401(k) and SIMPLE IRA, offer various advantages that enable you to channel more into your savings. Your choice of plan is influenced by your age, your profits, and whether you are a solopreneur or have employees for whom you’ll make contributions. The IRS’s Choosing a Retirement Solution for Your Small Business enables you to compare plan options.
Start by determining how much you’ll need to live comfortably once you stop working and proceed with this in mind. Factors to consider include:
- Your desired lifestyle
- Health care costs
- Current or future inflation
Utilize retirement calculators such as the one from Bankrate to estimate your needs. Use the information to set savings targets to enable you to stay on track.
Time is your ally when it comes to retirement savings. A person who begins saving at age 25 by depositing $75 monthly into a savings account will have more money when they retire than someone who starts saving $100 a month a decade later.
Tax savings from making contributions to qualified retirement plans and/or IRAs can ease your out-of-pocket cost for savings. There are deductions and credits available for selecting the right plan.
The key to a secure retirement is consistent saving. Make it a habit to contribute regularly to your chosen plan, regardless of how your company is doing. Even small, consistent contributions can accumulate into substantial savings. Plus, the compound interest and dividend reinvestments on investments in the accounts significantly boosts savings over time.
Set a fixed percentage of your business’s income to go directly into your retirement fund fortnightly or monthly. This will enhance convenience, save time, and eliminate the temptation to skip contributions during lean months.
Make the Most of Your Small Business
Saving requires strict financial discipline to bear fruit. This involves handling your company and personal finances separately to avoid confusion or overspending from business accounts on nonofficial ventures. This allows you to see your savings grow and make informed decisions about your business expenses.
Diversification is essential to managing risks, maximizing returns and building a viable portfolio for retirement. So, distribute your investments across multiple asset classes, such as stocks and bonds, as well as mutual funds and exchange-traded funds (ETFs). Spreading your money around — albeit strategically — reduces the consequence of market volatility on your retirement savings.
Review your retirement savings plan whenever there are shifts in income, personal expenses, or retirement goals. Assess your progress and make adjustments as necessary to stay on track.
Take Charge of Your Future
Setting smart retirement goals and choosing the right plan depends on your specific circumstances, so consult a financial adviser with experience working with small businesses. The adviser will help you navigate retirement accounts, tax implications, and investment options. Start saving today to enjoy a comfortable retirement tomorrow.
Find more information about retirement savings in this list of blogs.
