A 2014 study by the Guardian Life Insurance Company of America showed that nearly half of small business owners surveyed don't feel well prepared for retirement. But it doesn't have to be that way. A number of tools and strategies are available for small business owners to maximize their savings and minimize their tax burden. Here are a few tips to get you started.
Know your numbers
It's no secret that the earlier you start saving, the more time your money has to grow. But even if you're closer to the end of your working years than the beginning, it's never too late to save.
How much do you need? The conventional wisdom is shifting. Traditionally, people were advised that they'd need 70 to 80 percent of their current income in retirement. But some believe it's wiser to plan around your current spending patterns instead. Run the numbers a few different ways.
Diversify your money
According to the Guardian survey, small business owners are overly reliant on the success of their business to fund their retirement, and that's a risky move. Don't keep all your eggs in one basket. Of more than 1,400 small business owners surveyed, 77 percent said they did have money set aside in their own savings or investments, and 54 percent have invested in real estate. (About three-fourths of respondents owned businesses with one to 10 employees.)
Several tax-deferred retirement plans are available to small business owners and sole proprietors. See www.irs.gov/retirement for contribution limits and other details. The U.S. Department of Labor also produces a guide to choosing a retirement solution for your small business.
Max out your savings
By age 40, entrepreneur Jonathan B. Smith still didn't have any real retirement savings. So, Smith researched retirement plans and chose an individual 401(k) plus a Roth IRA, which offered the highest contribution amounts and the tax benefits he wanted. He used the funds from a recently exited investment to open his accounts.
"I thought, it makes more sense to put money away in single person 401(k) than to pay the current taxes," Smith says.
Take advantage of perks for business owners
Business owners are also allowed to contribute more to certain retirement plans than employees. For 2015 and 2016, the defined contribution limit from all sources is $53,000 for a 401(k). A business owner or solopreneur can contribute most of that him or herself, based on their income from the business. In contrast, company employees can contribute only $18,000 through elective deferrals, plus the company's matching contribution, if available (usually about 4 percent of salary).
Keep growing your company
A lot of small business owners expect to sell their business to fund their retirement. Unfortunately, many overestimate the value of their company, and a sale doesn't meet their retirement needs.
The key is to have a firm grasp of your company's value and keep it growing right up until the day you retire, says Bill Watson, who brokers business sales through his firm, Advanced Business Group. "If you know how to maximize that value, you will maximize the money you make as you go along and be able to put aside more for retirement," Watson says.
Don't fall into the trap of thinking your business can coast in your final working years. If you're not building value by continuing to seek new business, Watson says, your value will drop exponentially in a very short time."If you're transitioning to a sale, your business should be on an upward trend until you get the price you want," he says.
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