Most resources for business owners focus on getting started and growing your business. But just as much as you need to think about how to make your business a success, you also need to think about your future without it. Have you thought about your business owner retirement plan, and how you might earn money from your business after you’re done running it?
If you haven’t started planning for your retirement yet, you’re not alone. In Fact, 1 in 5 small business owners don’t have any retirement savings. It’s not too late to start your retirement planning! Use this guide to start preparing for your retirement.
What are the challenges of creating business owner retirement plans?
When you work for a set salary, you can set a goal and use your predictable monthly income to work toward it. When you own a business, you work toward that same goal but with a variable income. You’re also balancing this against the business’s cash needs to sustain operations.
This is all part of the operating cycle, or cash converting cycle, and it’s a big challenge for creating your business owner retirement plan.
For example, let’s say you own a fashion business. You might take some orders today and pay for production, wait three months for the finished goods, deliver to your customers, and wait another three months to get paid. In this scenario, you need enough cash to sustain your business for six months while waiting to get paid.
Working with this type of operating cycle can be a challenge. How can you make regular monthly contributions to a retirement fund when there is uncertainty about cash in your business?
How to create your business owner retirement plan
Here are the four most important steps to start creating your plan and set you and your business up for success:
1. Create a savings fund in your business
The first significant step in creating a stable savings plan for your retirement is to separate funds within your business. If you haven’t already, open a business savings account.
Most of the money that will go toward your retirement will come out of your business as a distribution or dividend. However, before you do that, you need to manage your business’s cash properly. If you keep funds earmarked for retirement in your general business checking account, they can easily be spent through debit and credit card purchases.
Establish a rule for the percentage of every sale deposit to be transferred from your checking account into your savings account, keeping in mind your retirement goals. To come up with this percentage, you’ll have to think about your business’s margins and operating cycle. Once it’s been set, stick to it, and make sure the transfer is made with every sale deposit.
Once you’ve started transferring funds into a business savings account, you can establish a distribution schedule. Sticking to a distribution schedule means you’re accountable for a certain number of distributions each month. The only funds you can take from your business come out of this distribution.
2. Choosing a small business retirement plan
There are two major types of retirement plans for small businesses: The Savings Incentive Match Plan for Employees (SIMPLE) and the Simplified Employee Pension (SEP) plans.
All major brokerages and banks in the U.S. can help you set up these retirement plans, and both are easy to administer. Both plans act just like an Individual Retirement Account (IRA) for you. They protect capital gains from taxes until you withdraw the funds from the account, allowing your earnings to grow at a faster rate.
The benefits for the business are even greater. Without a retirement fund, when you make distributions from your business, they aren’t counted as an eligible business expense. This keeps those distributions as part of your business’s taxable income.
When you create a SIMPLE or SEP, the contributions that your business makes to these retirement funds are treated as an eligible expense (up to the annual contribution limit). For a SEP, the annual contribution limit is 20% of your business’s net profits, or $61,000 in 2022. For a SIMPLE it’s up to $14,000. These are substantial tax deductions. Of course, you won’t be able to access these funds until retirement unless you pay a penalty.
3. Selling your business
When you retire, you’ll need to decide whether to sell your business. This is a major decision, so it’s important to do your research.
Not every business model is suitable for selling. For example, consulting businesses and restaurants can make great profits during their lifetime, but it’s difficult to find a buyer when they’re up for sale. In contrast, product brands and technology businesses might make relatively small profits during their lifetime but sell for a substantial amount of money when you decide to exit.
Two things you need to think about if you want to sell your business are continuity and intellectual property:
- Continuity: Your business has continuity potential if your profits are stable in the long-term and if it can survive without the original owners. If these conditions are met, then the business may be attractive to buyers.
- Intellectual property: If your business has a well-established brand name or a patented process, then it has valuable intellectual property. Buyers will see it as an asset that they may want to add to their own.
If you work towards building continuity or intellectual property into your business then a sale might be a worthy opportunity for you. Speak with a lawyer and an accountant to develop a value and a strategy for marketing the business if you choose to sell it.
It’s important to set expectations about selling your business. A smooth transition means slowly handing over responsibilities to the new ownership, and slowly being bought out. It doesn’t all happen overnight. You’ll also need to consider taxes. There are capital gains taxes, bulk sale taxes, and other income taxes that are affected by selling a business. A good accountant can help you manage these costs.
4. Review Regularly
Like any plan, it’s important to check in regularly to track your progress and make adjustments. You should review your retirement plan annually so you can adjust as your business grows or life circumstances change. Whether it’s increasing profits or adjusting your timeline, consistent check-ins ensure your strategy stays on track.
Start your business owner retirement plan today
Now that you know your options for retirement planning, you can start the process of mapping out your future beyond business ownership. Be sure to meet with your lawyer and accountant to make sure all aspects of your business owner retirement plan are covered.
If you need some working capital to cover your business’s needs while you set up a savings plan, talk to Pursuit! We offer more than 15 different loan programs that can support your working capital needs and more.