[Recording] The Entrepreneur’s Roadmap to Retirement Part 1: Make Saving a Priority
As an entrepreneur, you likely have a vision for your business. However, you may not have thought about your end goal. In other words, do you want to eventually exit your business and retire? If your answer is yes—or even maybe—you’ll want to ensure you’re financially prepared for your transition from business owner to retiree.
In this three-part blog series, we’ll be sharing what you should be thinking about and when as you approach retirement. First up on the entrepreneur’s roadmap to retirement is prioritizing your retirement savings.
#1: Take Control Of Your Retirement Savings
When: As Soon As Possible
You may be planning to sell your business to fund your eventual retirement. However, depending on your expenses, lifestyle goals, and age when you retire, the proceeds may not be enough.
You can give your retirement savings a boost by contributing regularly to a qualified retirement account. In addition, these accounts often deliver significant tax savings leading up to retirement.
First, Estimate How Much Money You’ll Need To Comfortably Retire.
A common rule of thumb is you’ll need about 80 percent of your pre-retirement income for each year of retirement. Of course, you’ll want to build some flexibility into this calculation, especially if retirement is in the distant future.
You can also track your spending to figure out how much money you’ll need for retirement. This can give you a more precise estimate but also requires a little more effort.
Use This Estimate To Calculate Your Monthly Contributions.
If you think about saving for retirement as a bonus when you have extra free cash flow, chances are you’ll always find something else to do with that money. Instead, make saving for retirement non-negotiable by treating it like a fixed business expense. Once you calculate how much you’ll need to save each month, consider it a recurring expenditure and incorporate the amount into your pricing model.
Contribute To A Tax-Advantaged Retirement Account.
Even if you can’t max out your contributions right away, you can still benefit from the power of compounding within a tax-deferred account. If you don’t have a company-sponsored retirement plan, there are several types of qualified retirement accounts available to self-employed individuals.
Anyone with qualifying income can open a traditional IRA. The contribution limit for traditional IRAs is the lowest of these options at $6,000 a year in 2021, with an additional $1,000 catchup after age 50.
A Simplified Employee Pension (SEP) IRA allows you to contribute 20% of your net income up to $58,000 in 2021. Since only employers can contribute to SEP IRAs—in this case, the employer is you—you can’t make catch-up contributions. However, you may be able to contribute an additional amount up to the current traditional IRA limit instead of funding a separate IRA. In other words, employer contributions and individual contributions are treated differently, even though both are coming from you.
A Solo 401(k) is just like an employer-sponsored 401(k) plan, except you’re the only participant. You can contribute up to $19,500 to a Solo 401(k) in 2021, plus an additional $6,500 if you’re over age 50. However, since you’re self-employed, you can make additional employer contributions above the $19,500 limit. In 2021, employer contributions are limited to 25% of your income up to $58,000 (which includes the $19,500 you already contributed), or $64,500 if you’re over age 50.
Cash Balance Benefit Plan
If you’re a high-earning entrepreneur, a defined benefit plan such as a Cash Balance Benefit Plan may be a good option. These simplified pension plans allow for large, tax-deductible contributions based on a formula. Unlike a traditional pension plan that pays a monthly annuity in retirement, your account balance is paid out in one lump sum. As a bonus, you can roll over the balance to an IRA.
Each of these options comes with unique pros and cons. Be sure to do your research or consult with a financial professional to determine your best approach.
The Entrepreneur’s Roadmap To Retirement Part 2: Planning Your Exit Strategy
Next on the entrepreneur’s roadmap to retirement is planning your business exit strategy. In the meantime, Oak Capital Advisors can help you determine where you are on your path to retirement relative to where you want to be. Request a free retirement assessment to get started. You can also download our free guide, The Ultimate Retirement Planning Checklist for Small Business Owners and Entrepreneurs.