I just recently read an article about the most stressful jobs in America. Of course, everyone has different opinions on this topic, largely based on their personal experience. I guess it’s not surprising that the top three most stressful, difficult jobs are; 1) serving in the military, 2) being a parent, and 3) owning a small business. Like many small business owners, I am serving in the last two roles simultaneously, which are the two I want to focus on here.
I find that the roles of parent and small business owner are very similar in many respects. Both have caused me to lose a bit of sleep and both have contributed to the growth of my gray hairs. And in both roles, whether it be at home or at work, I run a very tight ship. I need organization, discipline and effort.
With both jobs I feel the pressure and responsibility of supporting those who count on me. I need my business to continue to operate well, so that everyone in the office can keep coming to work each day and so that everyone at home can keep their shirts on their backs.
You see, the reason I am talking about this is because I want people to understand that since small business owners have a lot of pressure on them in the day-to-day operations, they often have very little time to plan for the future. I find in my private practice that this is becoming a big problem for many small business owners looking to retire. In fact, a recent BMO Wealth Management survey tends to agree with me and has discovered that about three in four small business owners have less than $100,000 saved for retirement.
As small business owners, we are taught to reinvest in our companies at every stage in the game, and that often outshines the need to invest in our futures. I consider myself fortunate, because planning for my retirement has always been a priority for me because, well . . . we are literally retirement planners. But most small business owners are not often reminded of the need to save for the future.
The BMO survey found that just 4 percent of small business owners have more than $1 million saved, while only 8 percent have even $500,000 and 68 percent are in the category of less than $100,000, as I mentioned above. Unfortunately, many of these good, hard-working folks now realize they won’t be able to retire until past age 72.
As you know, many people take their first step toward retirement planning with a 401(k) (or similar plan) from, you guessed it, their employer. Obviously, many small business owners don’t have this same luxury. A survey from TD Bank found that nearly half of these folks do not have a 401(k).
What many do not realize is that there are a lot of tax-advantaged vehicles available specifically for small business owners. Simple IRAs allow employees to defer up to $12,500 of their annual salary (with higher catch-up limits for older employees), and allow for an employer contribution as well.
A SEP IRA is another option for small business owners. For 2016, business owners (the employer) can contribute up to 25 percent of each employee’s salary with a maximum amount of $53,000.
Another option is what is called a solo 401(k). These are designed for self-employed business owners with no employees other than a spouse. With a solo 401(k), each spouse can elect up to $18,000 in salary deferrals, but the company can also contribute up to 25 percent of compensation. Total savings cannot exceed $53,000 for each spouse.
Although retirement planning for small business owners is unique and can be difficult, it is not hopeless—if you have the right strategy. But an important part of this strategy is an exit. What is your plan when that gloriously terrifying retirement day comes? Do you plan to sell your business, or hand it off to someone in the family, or do something else entirely? One major issue is that 35 percent of owners have no idea what they will be doing with their small business at the end of their careers.
Many small business owners depend on the sale of their company to provide retirement income, but doing this successfully requires planning. The TD study that I just mentioned states that 57 percent of small businesses are sole proprietorships. In order for a company to have value when it is sold, it must be able to run successfully without the seller. This isn’t the case with most sole proprietorships. Start thinking early about who could potentially take over your business. What training do they need now? What support will they need in the future? Think about whether it makes sense to grow your business now, so a future buyer can purchase a staff and an office building as well.
Folks, being a small business owner is similar to being a parent in that it is challenging, and stressful, but the sense of pride and reward involved is worth every bit of it. But, don’t let your dream of owning and running your business get in the way of your future.
Let’s have a quick talk over coffee and see how you can have both!