How to Create a Business Owner Retirement Plan

Business owner thinking about his retirement plan

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 own 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 as a business owner, you’re not alone. According to a study by SCORE, 34% of small business owners don’t have a retirement savings plan. It’s not too late to start your retirement planning. Get started today with the advice and tips below.

Business owner retirement plans: The challenges

When you work for a set salary you’re able to set a goal and use your predictable monthly income to work toward it. When you own a business, you’re working 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 in creating your retirement plan as a business owner.

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?

Create a savings fund in your business

The first major 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. Before you do that though, you need to properly manage your business’s cash. 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 that 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.

Choosing a small business retirement plan

There are two major types of retirement plans for small businesses. These are the Saving 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 IRA for the person that’s receiving the benefits. 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 take distributions from your business they aren’t counted as an eligible business expense. This keeps those distributions as part of the taxable income of your business.

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.

Selling your business

When you retire you’ll need to decide if you also want to sell your business. This is a major decision so it’s important to do your research.

Not every business model is suitable to sell. For example, consulting businesses and restaurants can make great profits during their lifetime, but it’s difficult to find a buyer when the business is 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 the business owners 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.

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.

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