Planning for retirement as a small business owner looks much different than planning as a lifelong employee of someone else. After all, self-employed people have to save for retirement all on their own, and their career timeline could look much different than a traditional employee.
For example, some small business owners try to build up a profitable business as quickly as possible so they can sell and retire early. Others may work a family business until their 60’s or 70’s, then decide to sell or be forced into retirement for health issues or other reasons.
Either way, small business owners really do face unique struggles when it comes to retirement, the first of which is the fact not enough business owners save for retirement the traditional way. In fact, a study from SCORE showed that 34 percent of business owners do not have a retirement plan of their own. Study statistics also showed 40 percent of small business owners were not confident in their chances at retiring by the age of 65.
Not having a retirement plan can be a big problem if you want to retire, but there are other issues, too. Here are some of the most common retirement transition struggles most small business owners will have to face:
Knowing their “Retirement Number”
Traditional workers with a pension plan may not have to worry about reaching a specific number for retirement, but small business owners face an exceptional challenge in this arena. Not only do small business owners need to feel confident they have enough in investments to cover their retirement, but they have to consider how their business may factor into their goals. After all, recent statistics show that 18 percent of small business owners plan to use the proceeds of selling their business to fund their retirement.
Knowing how much your business is worth is a major consideration when trying to plan for a major transition. From there, you have to know if you have enough funds to last.
If you’re a small business owner who is trying to figure out if you have enough to retire, there are a few rules of thumb you can use to decide. For example, many business owners strive to save up 25x to 30x their expenses in order to retire — $2.5 million to $3 million if you want to retire with $100,000 to spend each year.
Crafting a Comprehensive Exit Plan
Small business owners tend to encounter problems as they decide how to transition away from their business and when to do it. There are plenty of questions to ask, including:
- Who do you sell your business to?
- How much is your business worth?
- How do you structure the deal for your business sale to maximize benefits?
- When do you want to quit working?
While you can wait to answer these questions until you’re closer to retirement age, I actually suggest crafting an exit plan as early as you can — as in, now. Doing so will ensure you’re setting yourself up to have the money you need to retire when you prefer, and that you’re taking steps that can maximize the sale of your business later on.
Small business owners who plan to retire before age 65 have another challenge to consider — healthcare. Eligibility for Medicare starts at 65, and health insurance premiums can be exorbitant along with co-pays and annual deductibles.
Fortunately, the Affordable Care Act (ACA), which became law in 2010, included some important provisions that can make buying your own health insurance easier. First, you can purchase a health insurance plan regardless of any pre-existing conditions you have. Second, you may be eligible for generous subsidies that help cover your premiums provided your household income is between 100% and 400% of the Federal Poverty Limit (FPL).
If you are a household of two preparing to retire, that means you could be eligible for premium subsidies if your income is above $17,420 and up to $69,680. If your income is higher, on the other hand, you may want to brace yourselves for costly health insurance premiums until you’re eligible for Medicare.
Tax efficiency is another major hurdle small business owners who want to retire need to overcome. This is due to the complex nature of most small business owner’s retirement plans. For example, they may have a combination of tax-advantaged retirement accounts, brokerage account funds and the sale of their business to factor in during the planning phase.
How do you know how to structure your business sale and draw down your retirement accounts for maximum tax efficiency? In many cases, working with a financial planner and an accountant is the best move for small business owners who want to avoid costly mistakes and set themselves up for a lower tax bill.
Finally, business owners need to think long and hard about how their lifestyle might change when they sell their business and have more free time. For example, you may decide you are ready to take your retirement money and travel the world regardless of cost. Or, you could decide you want to live a simple life that lets you stretch your retirement assets considerably further.
Do you plan to pay off your home and other debts before you retire? If so, this move can make a substantial difference in your plans. After all, being free of a mortgage and other debts could mean having the option to retire earlier or having more cash to travel or fund other hobbies or dreams.
How Will You Transition to Retirement?
If you’re self-employed, then you’re probably used to feeling “on your own.” However, you don’t have to be on your own when it comes to creating an exit plan for retirement.
While you focus on running your business, an experienced financial advisor can help you maximize the financial end of the eventual sale. A professional can also ensure you’re saving for retirement in the most optimal way, and that your tax strategy makes sense for now and later on.
**** If you believe I am the person to help you exit your business, sign up for your free consultation here.