Why Planning for Your Retirement as a Business Owner Can Be Important

This tax season, you may want to take a close look at how well you're doing at planning for retirement. Are you saving enough money for your golden years?
March 24, 2017

Running a business is a lot like raising children. The concept is sparked, you give birth to the baby and then do your utmost to make sure your child grows big, strong and healthy. When your company is mature, you can sit back and relax a little, but not completely, because it will always be your company. While the development of the business is important, what tends to get forgotten along the way is planning for retirement.

Your financial outlook once you're done “raising" your business is vital. Now that we're in tax season, it's a good time to look closely at how well you're doing with planning for retirement.

“Unfortunately, many business owners get caught up in running the day-to-day business and investing in the company and forget about saving for retirement," says investment advisor and financial strategist Brent M. Wilsey, president of Wilsey Asset Management. "Planning for retirement should be one of the most thought-about and well-planned situations in your life. That way you won't be forced to work during your retirement years instead of playing golf or sitting on the beach."

Business owners tend to take care of their clients first. Make yourself your best customer and take care of yourself.

—Albert Zdenek, CEO, Traust Sollus

Engelo Rumora, owner of List'n Sell Realty, agrees. “Too many business owners get distracted with the present and daily running of the office," Rumora says. "But thinking about the future of your company and treating your personal investments as a business is where your success lies. I suggest allowing a couple of hours every two weeks to brainstorm investment ideas that you can 'set and forget.' Those investments will serve you in the future when you decide to retire."

How Your Personal Financial Goals Affect Your Business

Just as you look closely at the goals you have for your company, it's equally important to identify your personal financial goals when planning for retirement, believes certified public accountant Albert Zdenek, CEO and founder of wealth management company Traust Sollus and author of Master Your Cash Flow.

“The key to having a successful business that produces the income that allows you to live the way you wish now and in the future begins with you having a personal financial plan," says Zdenek. “Business owners tend to take care of their clients first. Make yourself your best customer and take care of yourself. A solid financial plan should tell you to what level the business has to grow in value so that you can save for retirement and live the way you want to now, while also paying necessary income taxes."

When planning for retirement, “figure out your end goal first," adds Rumora. “How much monthly cash flow do you need every month to live the lifestyle that you want to be living when you retire? Reverse engineer it from there, and whenever you have extra funds in your business, I suggest putting that to work in an investment property. Make sure that the cash flow from every property you buy gets you a step closer to achieving your end goal."

Planning for Retirement? Options for Business Owners

"In addition to investing in real estate, there are other options for planning for retirement that allow business owners to put away what can be substantial retirement savings, and many have great tax saving benefits," says Wilsey. “If you're self-employed and have no employees, two great options are the SEP IRA and the Solo 401(k)."

The SEP IRA allows the business owner to save 25 percent of compensation, up to $54,000 in 2017, according to the IRS. “The big benefits with this plan are that you get a tax deduction for putting the money into the plan, plus it grows tax deferred," says Wilsey. “Administration for the SEP is also minimal. One downside of the plan is that if you don't plan accordingly and you need to pull money from the SEP, you must pay taxes, plus a potential early withdrawal penalty."

The Solo 401(k) has the same tax benefits of the SEP and the contribution limit is the same at $54,000, unless you're over the age of 50. In this case, you're entitled to a catch-up provision and can contribute an additional $6,000.

“Due to the Solo 401(k)'s structure, you may be able to contribute more to the plan versus the SEP, but it's accompanied by more administration fees," says Wilsey.

If you have multiple employees, a 401(k) is a flexible plan that allows for employee and employer contributions, continues Wilsey. “There's also the option for a profit-sharing plan, which only permits employer contributions. These contributions are discretionary on a year-to-year basis. You can combine these plans to maximize retirement savings of $60,000 per year for yourself as the employer. The downside to these plans is that they have administration fees. These fees, however, are often overcome by the tax benefits that come with the plan."

When planning for retirement, if you think you'll simply sell your business when it's time to retire and live off those earnings, keep in mind that the sale is unlikely to provide sufficient funds for a comfortable retirement, believes Barbara Weltman, author of J.K. Lasser's Small Business Taxes 2017.

“Saving money in a qualified retirement plan shelters current profits and ensures sufficient retirement income," she says. “Maximize savings opportunities every year, monitor investment returns and don't touch the money until retirement."

Read more articles on work-life balance.

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