By: Stuart Robertson
Many Americans are adjusting to the idea of “going it alone” when it comes to retirement savings, as traditional big business programs, such as pensions, are rolled back and the future of social security is increasingly uncertain. But for small business owners, managing one’s own retirement plan has always been a fact of life.
Even though entrepreneurs know they’re solely responsible for their own retirement, setting up benefits and thinking through long-term financial planning are often put on the back burner to focus on more critical issues aimed at making their business survive and thrive.
How can today’s small business owners lay the groundwork for building a robust financial future? Here are three tips to consider as you work to establish a realistic retirement strategy while also nurturing a growing business.
#1 – Set up a 401(k)
This first tip may seem straightforward, but when we talk to small business owners, it’s apparent there is a pronounced lack of understanding related to how to access and benefit from a 401(k). Many small businesses don’t even offer a retirement plan. One common misperception among small business owners is they think they’re too small to offer a 401(k) plan, even though all businesses – even solopreneurs – are qualified.
Depending on your age, earnings and how employer contributions are made, you may be able to contribute and receive up to $62,000 in tax deferred investments and deduct contribution matches you pay into employees’ plans. That’s a double whammy of savings for the future; offsetting current personal and business tax burdens.
401(k)s can also be an attractive benefit for employees and help you retain top talent. Many professionals would consider leaving their current employer for one that offers better retirement benefits, especially if they offer a 401(k) plan with employer matching.
#2 – Put saving on auto-pilot
When you’re living and breathing your business day-in and day-out, it’s easy to overlook retirement planning, which could be 20, 30 or even 40 years down the road. Though it may be difficult to anticipate your future needs, try to get into the savings habit by making automatic contributions to an IRA or 401(k). Common wisdom suggests putting away 10 to 15 percent of your income if you can swing it. Also consider working to eliminate personal credit card debt and build up an emergency fund of three to six months to cover any unexpected financial needs.
#3 – Hedge against the future value of your business
Many small business owners believe their business’ current or future valuation are assets they’ll have access to once they retire. They expect their business to keep growing, or plan to sell the company and live off the profits.
This approach comes with a number of risks. For instance, timing the sale of your business with when you can get maximum value and when you’re ready to retire. There are a number of factors that drive business valuation, and since no one can predict just how future markets or industry trends could impact your company, it’s unwise to consider it the centerpiece of your nest egg.
It’s tempting to postpone retirement planning as you work full-throttle to grow your business, but it’s important to take steps now to gain control of your personal finances and develop a plan for your future. Establishing sound financial habits will help you build a roadmap to reach long-term goals, so you can enter your retirement years with confidence.
Advisory services are provided by Capital One Advisors, LLC, an SEC-registered investment advisor and a subsidiary of Capital One Financial Corporation.