Broker Check

My Business Is My Retirement

| May 09, 2023

     As a successful business owner, you and only you are completely responsible for your own retirement plan. Many business owners we meet say their business is their retirement plan. Meaning that when the business owner has decided they no longer want to work and want to retire, they will just sell the business for great profits and live off that money. On paper that sounds fine, but, as you read, you will see that there may be some challenges that arise with that thought process. The biggest issue is you. You are your company’s greatest asset. What is a company worth without its greatest asset? I am not 100% sure, but commonly it is worth significantly less without its largest asset. So, unless you plan to work for the people that you sell your business to, you should consider putting a more effective plan in place.

What are alternative options?

     For beginners, you can choose a traditional retirement strategy. Among different retirement savings account types, you can establish an IRA. There are multiple types of IRAs to choose from, like a SIMPLE (Savings Incentive Match Plan for Employees), Traditional IRAs, Roth IRAs, and SEP (Simplified Employee Pension) IRAs. They all have different rules for eligibility, contribution limits and distribution or withdrawal restrictions and penalties. You can contact one of our advisors to discuss which option may be best for you.

     In any case, you can also choose the route of a Solo 401(k). What is a Solo 401(k)? A solo 401(k) is an individual 401(k) designed for a business owner with no employees. In fact, IRS rules say you cannot contribute to a Solo 401(k) if you have full-time employees, though you can use the plan to cover both you and your spouse.

     If you have employees, you may feel responsible for creating a retirement plan for them as well. Overall, a 401(k) may be a good option for your business. A 401(k) is a feature of a qualified profit-sharing plan that allows employees to contribute and defer a portion of their wages to individual accounts. The employer can also make matching contributions to employees’ accounts as an incentive for workers to engage in retirement saving and planning.

Develop a Business Exit Strategy Ahead of Time

     It might seem odd to think about your exit strategy as one of your prioritized considerations. As I mentioned, the business that you have spent your life building may be your largest asset. If you want to fund your retirement and stop working (or slow down), then you will need to liquidate this investment one way or another. In preparation, you need to first make sure you set your business up to be able to operate without you, so it maintains value. Ultimately, you would want to sell your business during a strong economic cycle, or you may need to work a bit longer if the economy shows signs of weakness. The thing you want to avoid is a distress sale. If you wait until the last minute to exit or arrange your exit, it may create the impression of a distress sale among potential buyers, and you may not be able to maximize the earnings potential of the sale.

     Many small business owners say they plan to keep working and that is great! Establishing a retirement plan for your business, regardless of size or form of transition, can make the difference between having options and not. Do not back yourself into a corner by limiting your ability to end things your way.