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Small Business Owners Should Start Now to Prepare for Retirement


Small business owners are great at providing jobs, but in the aggregate, most are failing when it comes to preparing for a comfortable retirement for themselves and their spouses.

First, most of them are reinvesting almost everything into their businesses. According to a survey from the Bank of Montreal, 58% of business owners take out less than $25,000 per year to pay themselves, and more than three-quarters say they take out less than $50,000.

Only 8% of business owners reported being able to take out more than $100,000 over the past year.

Meanwhile, multiples in many industries are down, and small business owners are not getting the prices they expected when they actually want to put their businesses up for sale.

It’s critical for business owners to do two things: Begin setting aside money outside of the business to prepare for retirement, and start positioning your business for sale early. Here are some steps you can take:

Assess your situation and protect yourself
• Work with a financial advisor to generate a reasonable, conservative estimate of how much retirement income you’ll really need – and whether you’re on track to meet your goal.
• Meet with a financial professional and get a life insurance and disability insurance needs analysis done.
• Assess your need for key person insurance, cyber risk, employer liability and business interruption coverage to protect your business.

Start preparing your business for sale now
• Ask yourself, “Can my business run without me?” If the answer is “no,” you have work to do.
• Keep impeccable financial records. Use modern accounting software and get professional accounting. The better your records, the better the price you are likely to get when you sell the business.

Maximize tax-advantaged retirement savings
• Maximize your IRA or Roth IRA contributions.
• Set up a small business retirement plan – whether it’s a 401(k), a solo 401(k) (good for those with no full-time employees other than a spouse), a SIMPLE IRA or a SEP. These plans allow you to set aside significantly more money than you can within an IRA.
• Protect money from business creditors. Money in an IRA, 401(k) and in some states, annuities and cash-value life insurance, enjoys protection from both business and personal creditors. Money left in your business and in personal savings does not.
• Take advantage of a federal tax credit worth up to $1,500 designed to offset any expenses involved in setting up a qualified small business retirement plan, such as a 401(k), SEP or SIMPLE IRA.

Lastly, don’t think you’re too small to have a plan for your own retirement. Too many business owners fall prey to this misconception: A recent survey from Capital One showed that nearly six in 10 business owners thought they were too small to set up a business retirement plan.

But even an independent contractor or sole proprietor can have a fully funded IRA each year, and a small business retirement plan on top of that. The time to get started is now.