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Planning finances for small business owners can seem like a lot. Not only must you understand the business finances, but your personal finances too. Many small business owners tend to overlook retirement plans for small businesses, yet it's one of the most crucial factors.
Understanding small business financial planning and how to manage the financial health of your business and your personal life is the key to successfully achieving your financial goals.
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Small Business Financial Planning - Is Retirement Possible?
Retirement planning may feel impossible when you are a small business owner. You don't have someone setting up a retirement account for you and matching your contributions. Instead, it all falls on you, so is it possible, or do small business owners face too many financial challenges?
The good news is you have many ways to set up retirement plans for small businesses, and you have options depending on the type of small business you run.
Importance of Financial Planning for Retirement
First, let's touch on the importance of small business financial planning. As a business owner, you likely think of your operating expenses, financial obligations, and financial goals for the business, but what about yourself?
You are putting in the blood, sweat, and tears to run the business, but you deserve to be able to handle retirement planning, too, just as if you worked for someone who did it for you.
Types of Retirement Plans
Retirement plans for self-employed individuals are somewhat complicated because you must understand how they work, the administrative work required, and the laws. It's a lot!
But here are a few options when considering the best retirement plans for your company, depending on whether you have employees.
Business With Employees Retirement Plan
If you run a business with employees, you have two options:
- SEP-IRA - The Simplified Employee Pension plan allows employers to set aside money for retirement planning for themselves or their employees. In most cases, the employer contributes for the employee, and employers can contribute up to 25% of the employee's compensation or $66,000, whichever is less.
- SIMPLE IRA - The Savings Incentive Match for Employees is open to small businesses with 100 employees or less but allows employees to make their own contributions, up to $15,500 in 2023, with a catch-up contribution of $3,500 for those 50 and over.
Self-Employed Retirement Plan
If you work for yourself with no employees, a good self-employment retirement plan is the solo 401K.
This is the best retirement plan for anyone who runs a business or employs only their spouse. You can open traditional or Roth 401K retirement plans, but they require more paperwork than a SEP or SIMPLE IRAs.
The solo 401K allows contributions up to $22,500 in elective employee deferrals and up to 25% of the company's income, up to $66,000 total, with a catch-up contribution of $7,500 allowed for those over 50.
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How to Create a Financial Plan for Retirement
Creating a financial plan and following through on it may feel impossible as you run your small business. The key is making solid financial plans and comparing the different retirement plans to see which will help you reach your financial goals.
Establish Clear Goals
Set clear goals now to ensure you have the healthy cash flow needed for your retirement goals. Think about what you want in retirement, including the following:
- What type of lifestyle will you lead? Will you downsize, live the same lifestyle, or do something else?
- How will you handle health insurance and health costs?
- What age do you plan to retire?
- What do you want to accomplish in retirement?
The answers will help you determine the planning process you must use to meet your financial goals.
Work With a Team
When you own a business, you have a team of professionals helping you with your business financial plan, business goals, and other vital documents, such as your balance sheet, income statement, and cash flow forecast.
The same is true of your personal finances and financial goals. So, again, you need a team on your side, helping you understand your options, guiding you in your decisions, and ensuring you reach your retirement goals. You'll need financial advisors, CPAs, and business attorneys on your team.
We can offer advice, guide your financial decisions, and help you understand how to reach your goals.
Regularly Save for Retirement
After assembling your team of professionals, it's time to assemble the key components of financial planning, including setting up a way to save for retirement regularly.
The retirement account types you choose will determine how much you can save and when, and is a critical component of the planning process.
Anyone with earned income can open a regular IRA. The contribution limits are much lower than most other options, but they can supplement other retirement accounts well.
When tax planning, if you determine you need more tax write-offs, a regular IRA can be a good offset, but again, it shouldn't be your main retirement account.
The SEP-IRA allows business owners to save the most, so if you're behind on retirement planning, you may want to consider this option.
If you've saved for retirement but want to continue now that you don't have employer retirement plans and work for yourself, the SIMPLE IRA offers an easy-to-handle option with lower contribution limits.
The individual 401K is more complicated, just like an employer retirement plan, but also allows higher contribution limits if you need to catch up on retirement savings.
It's essential to consider a Health Savings Account when thinking of the best retirement accounts. While an HSA doesn't seem like a retirement account, it's pre-tax funds you can use for medical expenses. You don't pay taxes on the withdrawals if you use the funds for qualified expenses, making your savings worth even more in retirement.
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Diversify Your Savings
The best way to invest for retirement is to diversify your efforts. Putting all your money in one account is rarely a good idea. As mentioned above, adding a traditional IRA to other retirement account types can supplement your retirement planning efforts.
As you put together a solid financial plan to save for retirement, it's important to consider taxes. That's why using a tax planning professional is so important. Each financial decision you make for your business and retirement plan affects your tax liability. However, to have long-term success, proper tax planning should play a major role.
Adjust Your Estate Plan
Always keep your estate plan updated. Check on the beneficiaries you've named on each account, and consider the financial situation of your business. For example, if you own a business with a partner or a group of people, you may consider creating a financial plan to handle the business when you retire.
Create an Exit or Succession Plan
As you make informed decisions about your business, create an exit or succession plan. Discuss what will happen to the business, whether you'll pass it down or sell it. Also, determine what will happen to employees and where the business assets will go when you dispose of the business.
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Financial Planning Tips for Small Businesses
Small business financial planning can seem complicated or sometimes impossible, but with these steps, you can reap the potential benefits of owning a small business.
Start Saving Early
Any financial expert will tell you that starting early is the key to successful financial planning. Even if your cash flow isn't where you'd hope, save what you can. The earlier you save, the more time your earnings have to compound.
Utilize Liquid Assets
Try to keep your accounts receivable higher than your accounts payable to increase your business's liquidity. Your company's assets should provide a buffer to help you meet your short-term liabilities while you focus on future earnings to help you save for retirement.
Of course, any financial planning must include a risk management plan. When planning for the future, you have much to consider. Inflation, your lifestyle, financial goals, and health determine how much you need in retirement. Understanding the potential risks and how to mitigate them will help you successfully reach your goals.
The Bottom Line
Small business financial planning is the key to small business owners having enough personal funds for their retirement plan. Having enough available funds to save for retirement can help with retirement planning for small business owners.