Don’t bank on your business to fund your retirement

Aug 11, 2022, 4:00 AM | Updated: 9:38 am
FILE - Sheets of uncut $100 run through a printing press at the Bureau of Engraving and Printing We...

FILE - Sheets of uncut $100 run through a printing press at the Bureau of Engraving and Printing Western Currency Facility in Fort Worth, Texas, on Sept. 24, 2013. Retirement can loom like a dark cloud for small-business owners. Many invest blood, sweat and tears -- and every penny -- into building their business but never set cash aside for the future. A huge number of entrepreneurs have reported putting aside no retirement savings at all. For some, selling the business is their only retirement plan. (AP Photo/LM Otero, File)

(AP Photo/LM Otero, File)

Retirement can loom like a dark cloud for small-business owners. Many invest blood, sweat and tears — and every penny — into building their business but never set cash aside for the future.

A huge number of entrepreneurs have reported putting aside no retirement savings at all. For some, selling the business is their only retirement plan.

That’s a risky bet, says Keith Hall, president and chief executive officer of the National Association for the Self-Employed.

“You’re putting all of your eggs in one basket. Not just your current lifestyle, but your future,” Hall says. “If something goes wrong, you sacrifice both.”

And the list of things that could go wrong is long: Your business could fail. Your health could fail. You may not find a buyer. You may have to sell for less than you need. You may not be able to retire fully.

Rather than gamble on everything going right, diversify your nest egg so it will last you well into your later years.

MAKE RETIREMENT PLANNING A PRIORITY

Saving for retirement is often the last item on your budget and the first to get cut in favor of other priorities, Hall says. Instead, make it as important as paying your mortgage or running your business.

This won’t come naturally to most entrepreneurs, who are often hyper-focused on immediate needs and tend to plan in three- to five-year increments.

“It’s hard as an entrepreneur and small-business owner to think 20-plus years out,” says Mary Bell Carlson , owner of Carlson Consulting LLC. “I’m often figuring out what I need to do today for immediate cash and long-term profitability.”

But Carlson, a financial counselor and certified financial planner, makes a point to invest where she can. She and her husband contribute to his employer-provided retirement plan. They each also put money into individual retirement accounts, among other investments.

“My biggest lesson has been to start, no matter how small the amount; it’s just important to start,” she says.

Determine what you can afford, whether that’s 1%, 5% or 10% of your gross earnings, and commit to it, Hall says. Over a long enough window, even small, regular contributions will compound into something meaningful.

There are a number of retirement plans for small-business owners, each with requirements, stipulations and tax implications.

— TRADITIONAL, ROTH IRA: Individual retirement accounts are easy to open and available to virtually anyone. You can contribute up to $6,000 in 2022 (up to $7,000 if you’re 50 or older). The main difference between traditional and Roth IRAs is whether you want tax savings now or later. Traditional IRAs use pre-tax income, but you pay taxes when the money comes out. With Roths, it’s the other way around.

— SOLO 401(K): Available to business owners with no full-time employees (exception made for a spouse). The contribution limit is up to $61,000 for 2022, though that’s broken into two parts, each with limits. Similar to an employer-sponsored 401(k), contributions are pre-tax and withdrawals are taxed as income.

— SEP IRA: A Simplified Employee Pension IRA, or SEP IRA, operates much like a traditional IRA, except you can contribute a lot more. Annual contributions are capped at $61,000 in 2022 versus $6,000 for a standard IRA. Another key difference: If you put money into your own SEP IRA, you must contribute an equal percentage to employees. This option is best for solopreneurs or those with few employees.

— SIMPLE IRA: This option has a lower contribution limit, up to $14,000 in 2022 (for those under age 50), but it offers employee accounts and is easier for small companies to administer than a traditional 401(k). You must offer a 3% match or a blanket 2% contribution to all employees. You can deduct contributions made to your account and those made on your employees’ behalf.

GET INPUT FROM A PROFESSIONAL

Sure, you can try to decode which retirement plan is best for your business. Or you can work with a certified financial planner or registered investment advisor to determine the best path. Doing the latter can give you confidence in your strategy, help you avoid any costly penalties and ensure you don’t leave any money on the table.

If selling is still part of your retirement plan, the help of a professional is essential, says Norm Sherman, a certified mentor with SCORE , a national volunteer organization that offers free business mentorship. First, you need to know whether your business is sellable and what you can realistically expect to net in a sale.

An investment banker or business broker can evaluate your revenue, profit margins, business structure and market to give you an honest assessment and help you better position your business for a future sale.

“It costs you nothing to get answers to these questions,” Sherman says. “Don’t operate blindly; find experts who can help you.”

________________________________________

The content is for educational and informational purposes and does not constitute investment advice. Kelsey Sheehy is a writer at NerdWallet. Email: [email protected] Twitter: @kelseylsheehy.

Related links:

How to bounce back after a business fails https://bit.ly/nerdwallet-after-business-failure

Retirement plan options for the self-employed https://bit.ly/nerdwallet-retirement-plans-self-employed

Roth IRA vs. Traditional IRA https://bit.ly/nerdwallet-roth-or-traditional-ira-account

What is a SEP IRA? How SEP IRAs work https://bit.ly/nerdwallet-sep-ira

Copyright © The Associated Press. All rights reserved. This material may not be published, broadcast, rewritten or redistributed.

AP

Associated Press

NC Senate candidates to meet in likely only televised debate

RALEIGH, N.C. (AP) — The two major-party candidates seeking to succeed retiring North Carolina Republican Sen. Richard Burr are meeting for what is likely their only televised debate. Democrat Cheri Beasley and Republican Ted Budd agreed to a one-hour debate being held Friday night at a cable television studio in Raleigh. Budd is a three-term […]
23 hours ago
Jordan Cromer cleans water-logged items at his home, Tuesday, Oct. 4, 2022, in North Port, Fla. Res...
Associated Press

Hurricane Ian floods leave mess, insurance questions behind

NORTH PORT, Fla. (AP) — Christine Barrett was inside her family’s North Port home during Hurricane Ian when one of her children started yelling that water was coming up from the shower. Then it started coming in from outside the house. Eventually the family was forced to climb on top of their kitchen cabinets — […]
23 hours ago
Attorney Chris Mattei displays a video during his closing statements in the Alex Jones Sandy Hook d...
Associated Press

EXPLAINER: Jurors weigh cost of Alex Jones’ Sandy Hook lies

WATERBURY, Conn. (AP) — For a decade, the parents and siblings of people killed in the Sandy Hook Elementary School shooting have been tormented and harassed by people who believe the mass shooting was a hoax. How do you put a price tag on their suffering? That’s part of the task faced by a Connecticut […]
23 hours ago
FILE - Suffolk County Congressman Lee Zeldin listens as he prepares to participate in New York's Re...
Associated Press

GOP steps up crime message in midterm’s final stretch

NEW YORK (AP) — The graphic surveillance video shows a man on a sidewalk suddenly punching someone in the head, knocking them to the ground. With muted screams and gunshots in the background, the video stitches together other surveillance clips of shootings and punching on streets and subway trains as a voiceover says, “You’re looking […]
23 hours ago
Javier Diaz poses for a photo next to his home that was destroyed by Hurricane Ian in La Coloma, in...
Associated Press

10 days later, Cubans still recovering from Hurricane Ian

LA COLOMA, Cuba (AP) — Soldiers fix roofs and raise power poles under a blazing sun, while teachers salvage wet school books and residents cook over wood fires in La Coloma, a fishing and industrial town on Cuba’s coast that took the brunt of Hurricane Ian. Ten days after the storm left still unquantified devastation […]
23 hours ago
FILE - A sign advertises for help The Goldenrod, a popular restaurant and candy shop, Wednesday, Ju...
Associated Press

US hiring likely slowed last month (which may be good news)

WASHINGTON (AP) — The piping-hot U.S. job market may be cooling off, if only slightly. But what business managers, policymakers, investors and economists want to know is this: How cool would be cool enough for the inflation fighters at the Federal Reserve to begin to ease their aggressive interest rate hikes? The government’s jobs report […]
23 hours ago

Sponsored Articles

...
Quantum Fiber

How high-speed fiber internet can improve everyday life

Quantum Fiber supplies unlimited data with speeds up to 940 mbps, enough to share 4K videos with coworkers 20 times faster than a cable.
...
SCHWARTZ LASER EYE CENTER

Key dates for Arizona sports fans to look forward to this fall

Fall brings new beginnings in different ways for Arizona’s professional sports teams like the Cardinals and Coyotes.
...
Mayo Clinic Orthopedics and Sports Medicine

Why your student-athlete’s physical should be conducted by a sports medicine specialist

Dr. Anastasi from Mayo Clinic Orthopedics and Sports Medicine in Tempe answers some of the most common questions.
Don’t bank on your business to fund your retirement