Retirement Planning Options For Small Business Owners

According to a recent BMO Wealth Management survey of 400 small business owners, only a fraction of America’s entrepreneurs are prepared for retirement. A striking 75% of survey respondents age 18 to 64 have saved less than $100,000 for retirement. Those age 45 to 64 are only marginally more prepared: 32% have over $100,000 in retirement accounts and only 11% have more than $500,000.

Why don’t more small business owners save for retirement?

For many entrepreneurs, the business is their retirement plan. They expect that when they retire, they are either going to transfer the business to a family member in exchange for a share of future wealth or a buyout, or they are going to sell it off and turn that into cash.

This all-your-eggs-in-one-basket approach can be dangerous for a variety of reasons. If the business fails, your wealth goes away.

When business owners age 45 to 64 were asked by BMO Wealth Management what contingency plans they had if their business couldn’t be sold or if the proceeds wouldn’t be sufficient for their retirement, 28% said they’d delay retirement.

With any luck, their health will hold out. When the Employee Benefit Research Institute surveyed retirees in 2016, 55% of those who retired earlier than they’d planned did so due to health problems or disability.

For small business owners, it’s not that they don’t want to save for retirement outside of their businesses. Their priority is to plow earnings back into the business to keep it growing, so they rarely pay themselves a big salary.

If you are a small business owner, much of your wealth is trapped in your business. The problem? In order to diversify that wealth, you have to remove that wealth from the business, and, in essence, remove some of the lifeblood from the business. Taking money out impinges on growth prospects and it can make it hard to maintain the business.

Another reason for the shortage of retirement savings could be that many businesses are fairly modest. When owners were asked the value of their business if it were sold today, 55% estimated less than $500,000. Only 13% believed their businesses were worth more than $1 million.

A key question for business owners, whether from a retirement perspective, a potential sale, or even the continued operation of a business is “Does the business run without me?” If the answer is no, there could  be difficulties valuing the business, finding a buyer or even generating income from it when you’ve left or are less active in it. Once you know what the income might be, then you can go back into how much you need to save.

Here are three ways small business owners can ramp up their savings for retirement:

  1. Run your numbers. Ask yourself: How much will I need to live on in retirement, especially when the business isn’t picking up the tab for some expenses? Just getting a sense of what your
    living costs might be when you quit working could be the retirement-savings wake-up call you need. Most major financial services firms offer free online retirement worksheets and calculators to help you get a sense of future expenses.
  2. Consider hiring a financial adviser to jump start your retirement plan and help you focus. We recommend one with the Certified Financial Planner (CFP) designation. A few searchable databases: the National Association of Personal Financial Advisors, The Garrett Planning Network, the Financial Planning Association and the Certified Financial Planner Board of Standards.
  3. Start a diversified retirement plan. You don’t have to throw a gob of money into it, but the funds will help trim your tax bill now and grow tax-deferred until you make withdrawals in retirement. In most cases, the cost of opening and administering a plan is pretty small. The The four main options: a SEP-IRA, a SIMPLE IRA, a Solo 401(k) and a SIMPLE 401(k). For all but SEP-IRAs, a business can be a sole proprietorship, a partnership, a limited liability company or a corporation.

A SEP-IRA is a tax-deductible retirement plan like a traditional IRA and great if you’re the company’s only employee. For 2017 tax returns, you can contribute up to 25% of your compensation or
$53,000. One caveat: If you have employees, you generally must also fund SEP-IRAs for them.

A SIMPLE IRA is a retirement plan for owners with 100 or fewer employees. Contributions are pre-tax and taken directly out of employee paychecks, similar to a 401(k). Your contribution can’t exceed $12,500 in 2016, $15,500 if you’re 50 or older.


A Solo 401(k) is for self-employed people without employees (except perhaps a spouse). The IRS lets you contribute this year, pre-tax, up to 25% of your compensation plus an employee’s contribution of up to $18,000 (or $24,000, if you’re 50 or older). But your total contribution can’t exceed $53,000. If your spouse works with you, she or he can also put in the same amounts.

A 401(k) is a feature of a qualified profit-sharing plan that allows employees and the owner to contribute a portion of their wages to individual accounts. The 401(k) elective deferral limit is $18,000. Individuals who are over 50 years old and expect to hit the 401(k) elective deferral limit can contribute an additional sum of up to $6,000, which is the catch-up contribution limit. According to research, 60% of small business owners don’t think they have enough employees to offer a plan, which is a prevalent misperception. The truth of the matter is any size business, even an owner-only business, can set up a business retirement plan.

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