Tips for planning for retirement as a small business owner

October 12th, 2017 Niki Prom

While operating your own business has many benefits, it comes with its fair share of unique challenges, too. One of them – planning for retirement.

For many entrepreneurs, it’s tempting to funnel profits back into the company as opposed to saving for the future. While this may help your business grow, it is not necessarily a good strategy for you personally.

As a small business owner, you are fully responsible for your own retirement savings. This takes self-discipline and planning. It can be hard to build your nest egg when you’re trying to get a business up and running. While your road to retirement may be different than that of the average worker, that doesn’t mean it has to be more difficult or complicated.

Here are a few tips that will help you effectively plan for your retirement while running your own business.

Calculate what you’ll need

This part isn’t too different from the average worker. To begin, you’ll need to calculate how much money you’ll need to have when you retire. This number is based on the age at which you plan to retire and the lifestyle you plan to have. What are your goals for retirement? Do you want to travel the world? Or would you be content to stay closer to home?

There are many online retirement calculators that can help you with this part of the planning process, such as this one on the MidWestOne website. It is also helpful to talk to a financial advisor. They are experts at looking at financial situations and working with clients to find a plan that fits.

Find the strategy that works for you

After assessing your own situation, it is time to decide what savings approach works best for you. There are a few tools that are particularly effective for people who are self-employed. Please note that it’s always worthwhile to speak to a financial advisor about your unique situation – you can consider this a high-level overview of some popular options that are available and use it as a starting point.  Here are some retirement savings strategies you can consider:

A solo 401(k)

Max contribution: 25% of your compensation or $18,000 ($24,000 if older than 50)

The Solo 401(k) option is ideal for a person who is self-employed and does not have employees. A spouse may also contribute to this account. The Solo 401(k) utilizes a qualified profit sharing strategy that allows you to contribute part of your wages to an individual account.


Max contribution: 25% of your compensation or $53,000

The SEP (Simplified Employee Pension) IRA is an IRA-based plan to which employers may make tax-deductible contributions on behalf of eligible employees, including the business owner. If the self-employed person does have employees, all employees must receive the same benefits under a SEP plan. Since SEP IRAs are a type of IRA, funds can be invested the same way as most other IRAs.

Remember – no one plan is the end-all solution for retirement savings. It is always smart to diversify your portfolio to minimize risk.

Simple IRA

Max contribution: $12,500 ($15,500 if older than 50)

A SIMPLE (Savings Incentive Match Plan for Employees) IRA is a way for you to save for your retirement and also help your employees save. It’s a very commonly used option by small business owners with less than 100 employees. It allows the company as well as the employee to contribute to the employee’s savings account. With this plan, employees can make either non-elective or matching (tax-deductible) salary reduction contributions to an existing Individual Retirement Annuity (IRA) or an account for all employees.

Develop an exit strategy

One of your largest assets contributing to your retirement fund may very well be the sale of your small business. Several factors will go into this sale so it is never too early to begin planning for your exit.

You will need to know how much your business is worth during what market conditions. Because the value of your business will fluctuate based on the market, you should keep this in mind when planning for retirement. Setting a concrete retirement date may not be possible as you may have to wait out a recession to sell your business for its entire worth.

It is also important to begin scouting potential buyers before you start the selling process, as finding a suitable buyer may be difficult. One way to help this process is to begin making your business more self-sufficient so it will still be able to operate without your oversight. Finding a prudent balance between business growth and personal savings can be difficult. Don’t shy away from working with a professional financial consultant to find the optimal trade-off balance between growing your business and saving for your retirement.

Remember, it is never too early to start planning. Use these tips as a blueprint, but don’t be afraid to consult an expert if you find yourself stuck or confused by the process.

About the author

Niki Prom is a Commercial Banking Officer with MidWestOne Bank.

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