Entrepreneurs enjoy some unique opportunities when it comes to preparing for the golden years. But with all of the pressures of running a business, many owners neglect personal planning—and delays can be costly. For example, saving the same amount annually for 20 years will produce a nest egg 60% smaller than if you’d saved for 30 years (assuming a hypothetical 8% annual average investment return). And starting early isn’t the only path to a more secure retirement. Consider these five tips.
1. Think about owning. Many arguments for buying a personal residence make just as much sense where business property is concerned. In both cases, the chance to build equity usually beats shelling out rent you’ll never get back. In terms of retirement planning, if you own business property, you could hold onto it even after you sell the company, thus enabling you to collect rent from the new owner. Or if the property has appreciated significantly, you could sell it and use the after-tax proceeds to brighten your retirement.
2. Make the most of tax-deferred plans. It’s your company, so install the retirement plan that best suits your needs. For many businesses, that’s a 401(k). It lets you save more tax-deductible dollars than many other plans do, and it doesn’t oblige you to contribute for workers—or even for yourself.
For 2017, individuals may contribute up to $18,000 to all 401(k) plans (including any at other companies), although if you’ll be at least age 50 by year-end, you can put in an additional $6,000—and you should. Saving that extra amount each year from age 50 through 65 could boost the retirement kitty by tens of thousands of dollars.
But the story gets even better if you combine your company’s 401(k) with a profit-sharing plan. Under such an arrangement, your 2017 contribution could be as high as $54,000, or $60,000 if you’re at least 50. Profit sharing requires contributing on behalf of workers, but only during profitable years, and vesting requirements could slow those payouts. And if you have no staff? “Solo” 401(k) plans for owner-only enterprises (including sole proprietorships) incorporate profit sharing and let any family members who work in the business participate in the plan. That could help you channel more money for retirement to your spouse.
3. Build yourself a pension. If your goal is to put away the absolute maximum every year and you don’t mind contributing for workers (or don’t have any), a defined-benefit pension plan could be right for you. You choose the retirement income you want, based on your earnings history and the current $215,000 IRS maximum (adjusted for inflation). Then an actuary determines how much you need to save each year to meet that objective, based on factors including your age and a projected investment return. For a successful middle-aged entrepreneur—the primary user of this plan—that amount is often measured in six figures.
Deducting a contribution of that size obviously produces mouth-watering tax savings. But there is a drawback. Contributions are essentially required every year (for workers, too), although you may be able to make a reduced contribution, or none at all, in lean times. Still, you should adopt a defined-benefit plan only if you expect to be able to afford hefty contributions for several years. (This vehicle, too, can be customized for owner-only businesses.)
4. Diversify properly. Your retirement investments should complement, not duplicate, the wealth in your business. If you invest in different industries than those your company and its customers are involved in, you’ll reduce the chance that a downturn in a single sector could wreak havoc on both your business and your portfolio.
5. Plan your exit. Experts generally advise getting ready to divest your business as early as 10 to 15 years in advance. Getting out is complicated, and it’s likely to affect every kind of tax imaginable—income, capital gains, gift, estate. It also requires answering tough questions, such as whether a family member has the skill and interest to take over the company, and if so, when?
And if no heir will succeed you? Figure on spending at least three years preparing your company for sale. That’s how many annual financial statements prospective buyers typically examine. Streamline operations beforehand so you can present the strongest possible profit-and-loss picture on the way to getting the most for your enterprise and making your retirement truly golden.
This article was written by a professional financial journalist for Advisor Products and is not intended as legal or investment advice.