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Retirement Planning for Small Business Owners

Business Executive with Laptop and CoffeeThe Census Bureau reports that 76% of all businesses within the United States are 1-person self-employed entities and operating with no other employees.  That is a great (but not surprising) statistic. This country was founded on the ideals of the individual and the hope of prosperity. So, it’s not surprising that we are a people who flock to the idea of setting out to find their own success, whether it be full time or a side hustle. “O beautiful for spacious skies” and where entrepreneurism is alive and well.

Why retirement planning matters, even if you’re the owner

But, with great freedom in your career comes great responsibility – for your personal finances. Owning a small business does not preclude you from the necessity of retirement planning. Yes, it’s true that equity in your company has the potential of growing, and at a very fast rate. As an advisor, I never want to get in the way of an owner who reinvests in their business to grow it. This is a very important ingredient for small and large businesses in creating the potential to level up. Often, the potential for investment growth within a solid small business model is exponential when compared to a diversified portfolio in the market. Why would we want to stop or slow that process?  We don’t, but we should want to mitigate the risk (I love that phrase).

Taking NotesRetirement planning can mitigate small business risk

Earmarking funds for investments within different strategies and sectors from your own business will offer a level of safety, should your business hit turbulent waters. Not to be a downer, but every business does have a life cycle, which includes a beginning and an end. That’s real life.  In other words, why would we have the expectation that 100% of your investment and retirement portfolio should be in only one small business? Example: let’s say a friend of yours walked into my office tomorrow and asked for portfolio advice. And I told them to take all their investment assets and buy into one small, non-publicly traded company. You might have strong feelings about my ability as a financial advisor, right? I wish for nothing but success for every small business owner reading this, but we must see how we can mitigate the risk. (Told you I loved that phrase.)

Types of small business retirement plans

Taking full advantage of tax qualified products offered to small business owners will not only help with this problem of diversification (i.e., outside of your business equity) but also assist in tax reduction. I’m talking about SEP, SIMPLE, and 401k options. Depending on the size of your business, goal of the account, and your personal portfolio needs — you can select one of these options. They allow you to contribute pre-tax dollars on behalf of you and your business to your retirement plan.

I’ve been assisting more and more small business owners with these plans lately. I’ve realized that these are not “one-size-fits-all” retirement strategies. I stress that you work with your financial advisor as well as your accountant, to together make intentional decisions that best fit your needs.

Elderly Couple in LoveOther ways small business owners can invest

Retirement accounts are not the only way to save money. I would encourage all small business owners to have a “non-qualified” investment account. Meaning, an account that does not have tax qualified benefits to it, in contrast to the plan types we discussed above.

This will give you an access point to invested cash in the event of an emergency or liquidity need (possibly for further reinvestment to the business).  If all your money is tied up in one place (the business, your retirement accounts, or hard assets) when that need comes along, your options are limited. You’d have to liquidate assets, take out a loan, or dip into your retirement. This creates risk and could lead to unnecessary taxes and penalties.

Overall, the idea is to give yourself options in retirement while you’re still in “accumulation mode.” Use investment resources outside of your business to allow you to make good decisions based in equity rather than ones based on need.

Being able to pivot is vital for a small business owner, both in good times and bad. And there will be both! If I can ever be a help to you or your small business, please let me know.


May 2019

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