Are you a small business owner? As of 2013, there are almost 28 million small businesses in the US. A small business is recognized as having 500 or fewer employees. Here is some additional information on the surge of small businesses.
- 22 million, or 75%, are non-employer small businesses (ones with no additional payroll or employees)
- 543,000 new businesses are started each month
- 1/4 will stay in business 15 years or more
- small businesses employ 50% of the working population and have created 65% of new jobs since the mid-1990s
With 10,000 Americans reaching retirement age every day, retirement planning should be somewhere near the top of any small business owner’s to-do list. But when you’re doing it all on your own, it’s easy for retirement, which can seem so far away, to get pushed aside.
How Can Small Business Owners Build Retirement?
Pay Yourself First!
We asked Diamond Credit Union’s Business Services Manager, Jim Hufford, to provide his advice for small business owners as they create a retirement savings plan for the future.
“Some business owners feel that putting everything back into the business will secure their future, but that future is uncertain. A business may lose value over time due to technology changes that they do not keep up with, for example.
In my view, a budget line item for all small business owners should include a figure for retirement. The amount for retirement gets paid like any other expense on a monthly basis. A new business can start with a modest amount and increase it annually as their business becomes more profitable. Salting away any amount in a relatively untouchable retirement account will almost certainly grow in value over time irrespective of the value of their business.”
In the absence of a traditional 401(k) employee-sponsored program, here are other options that small business owners can take advantage of to grow their retirement savings.
Non-employer business owners earning freelance income or business owners with one or more employees can open a SEP IRA, a type of Traditional IRA. The annual contribution limit is 25% of your net income, with a current cap of $49,000.
Small business owners with 100 or fewer employees, each making more than $5,000 in the preceding year, can participate in a Simple IRA plan. Employees can contribute up to $11,500, with workers over 50 years old being able to contribute an additional $2,500. A Simple IRA requires the business owner to make contributions on the employees’ behalf, either dollar-for-dollar up to 3% of their salary, or a flat contribution of 2% of their salary.
Selling Your Business to Fund Your Retirement?
Baby Boomer small business owners may consider this option as a way to fund their retirement. A recent survey showed that 35% of business owners are counting on the sale of their business to finance their retirement. However, only 17% have identified a buyer.
There are several factors that can affect this retirement strategy. The first is, of course, finding the right buyer at the right time. Your retirement schedule can often fall out of your control as health or family issues may move up or delay a target date. Additionally, the economy and market conditions may make it hard to find a buyer who can obtain financing when you’re ready to sell. While the sale of a business can certainly supplement a retirement plan, it shouldn’t be the entire plan.
If you have questions on small business planning, the Business Services professionals at Diamond Credit Union may be able to help.