These five habits can help you retire a millionaire without relying on proceeds from the sale of your business to fund your retirement.
Many small business owners plan to fund their retirement through the sale of their business. Yet in reality, 90% of businesses listed by business brokers never sell. That means if you don’t have a well-planned exit strategy in place, you’ll likely need to supplement your retirement funds with savings.
Indeed, there’s no magic number when it comes to saving for retirement. The exact amount of money you’ll need depends on a variety of factors, including when you plan to stop working, your lifestyle goals, and your overall health. Nevertheless, many people strive to have at least $1 million in liquid assets when they stop working.
If you’re behind on your retirement savings, this number may seem daunting. Fortunately, you may still be able to retire a millionaire by upgrading your personal money habits today.
Adopting these money habits may help you retire a millionaire:
Millionaire Habit #1: Start Today (Or Better Yet, Yesterday)
Compound interest can be a powerful force in positive markets. Even at a modest rate of return, an initial investment can double over a relatively short period.
The best way to take advantage of the power of compounding is to start saving and investing your free cash flow as soon as possible. The average 401(k) millionaire starts saving early and remains invested for at least 30 years, according to a recent Fidelity study.
But that doesn’t mean you can’t catch up if you’ve fallen behind on your savings. As a business owner, you have a variety of self-employed retirement account options that can help you close the gap. Many of these account types have high contribution limits, so you can catch up on your savings relatively quickly.
Millionaire Habit #2: Maximize Your Retirement Plan Contributions to Retire a Millionaire
Depending on the age and nature of your business, maxing out your retirement plan contributions may be challenging. Still, it’s important to take advantage of your strong free-cash-flow years if your goal is to retire a millionaire.
A Solo 401(k) or SEP IRA, for example, may be ideal if you’re a high earner or need to catch up on your retirement savings. In 2022, you can contribute up to $61,000 to either type of plan. And if you’re age 50 or older, you can contribute an additional $6,500.
Millionaire Habit #3: Choose the Right Asset Allocation
Asset allocation is the mix of investments you hold across your retirement and other investment accounts. For long-term investors, this mix is the most important determinant of your investment performance over the long run. Indeed, more than 90% of the variability of an investment portfolio’s performance over time is attributable to asset allocation, according to some well-known studies.
Investing in growth-oriented investments like stocks and commodities can help significantly boost your savings over time so you can retire a millionaire. These asset classes can also help you outpace inflation, so you can maintain your lifestyle in retirement.
Millionaire Habit #4: Don’t Cash Out Early
To retire a millionaire, staying the course is essential. The most successful retirement savers don’t just start early; they stay invested long-term.
If you need cash, consider all other options before dipping into your retirement savings. Early withdrawals come with tax consequences and other penalties, which can undo years of progress.
In addition, resist the temptation to market-time—for example, panicking and going to cash when markets are turbulent. Market-timing is nearly impossible as it requires you to get two decisions right: when to exit the market and when to get back in. And while going to cash may help you avoid the worst trading days, you’re also more likely to miss the ensuing recovery.
In fact, a recent study from Bank of America illustrates how staying invested is, on average, more profitable than attempting to time the market. By analyzing data going back to 1930, BOA found that if an investor missed the S&P 500′s 10 best performing days per decade, they would have earned 28%, cumulatively. Meanwhile, those who stayed invested the entire time would have earned a cumulative 17,715%.
Millionaire Habit #5: Take Advantage of Tax Planning Opportunities
Lastly, look for opportunities outside of traditional retirement savings accounts to save more of your hard-earned money. For example, depending on your healthcare plan, you may be eligible for a health savings account (HSA). An HSA offers a rare triple-tax treatment to help business owners save for current or future healthcare costs.
Here’s how it works: you contribute to your HSA with pretax dollars. Your HSA investments then grow tax-free until you need to withdraw funds. In addition, withdraws are tax-free so long as you spend the funds on qualified healthcare costs. And since your HSA funds never expire, you can leave them in the account to grow tax-free through retirement.
Recommit to Your Retirement Plan to Retire a Millionaire
If you haven’t revisited your retirement plan in a while (or don’t have one at all) now may be the right time to recommit to your savings and investment strategy. It’s never too late to change your financial habits and potentially retire a millionaire.
A trusted financial advisor like Oak Capital Advisors can help you develop a plan to exit your business and retire on your terms. Request your complimentary Financial Independence Roadmap™ to begin your retirement planning journey.