As a small business owner, you’re an expert in wearing many hats. From marketing and sales to operations and customer service, you manage it all. But there is one hat that often gets left on the shelf: retirement planner. The demands of running a business can make it easy to push your own financial future to the back burner. This delay, however, can lead to significant challenges down the road.
Proper retirement planning is critical for entrepreneurs, who face unique hurdles that typical employees do not. Your income can be irregular, and you don’t have an employer-sponsored 401(k) to lean on. Understanding and avoiding common retirement planning mistakes is the first step toward securing a comfortable future. This article will guide you through four frequent missteps and provide actionable advice to help you build a solid financial foundation for your post-work years.
Mistake #1: Skipping a Retirement Budget
One of the most fundamental errors in planning for retirement is failing to create a budget. It’s impossible to know how much you need to save if you don’t have a clear picture of what your expenses will look like. A retirement budget serves as the blueprint for your financial goals, helping you understand the assets required to sustain your desired lifestyle.
Without a budget, you’re essentially flying blind. You might be overestimating or, more dangerously, underestimating the funds you will need. This oversight can force you to make drastic lifestyle changes or even outlive your savings.
How to Create Your Retirement Budget
Creating a retirement budget is a proactive exercise in envisioning your future. Follow these steps to get started:
- Estimate your essential expenses. Start by listing all your non-negotiable monthly costs. This includes housing (mortgage or rent), utilities, healthcare, food, and transportation. Remember to account for inflation and rising healthcare costs, which tend to increase significantly in retirement.
- Factor in discretionary spending. What do you want your retirement to look like? Consider your hobbies, travel plans, dining out, and entertainment. Assign a realistic monthly or annual cost to these activities. Be honest about your aspirations to ensure your savings target is accurate.
- Review and adjust. Once you have a complete list, add up the totals to get a target annual income. Compare this figure to your projected retirement income from savings, Social Security, and other sources. If there’s a shortfall, you can either adjust your savings goals now or revise your discretionary spending plans for retirement.
Creating this budget provides a tangible goal. It transforms the abstract idea of “saving for retirement” into a concrete number you can work toward, making it one of the most important steps in avoiding common retirement planning mistakes.
Mistake #2: Ignoring Social Security Contributions
When cash flow is tight, it can be tempting to minimize your taxable income to reduce what you owe in self-employment taxes. While this offers short-term relief, it can have long-term consequences for your Social Security benefits. Your future Social Security payments are calculated based on your 35 highest-earning years, and paying yourself a consistently low salary can significantly reduce this vital income stream.
Many entrepreneurs undervalue Social Security, viewing it as a minor supplement. However, it can provide a reliable, inflation-adjusted source of income that protects you against market volatility and longevity risk — the risk of outliving your assets.
Optimizing Your Contributions
You don’t need to maximize your tax bill, but you should be strategic about your contributions.
- Pay yourself a reasonable salary. If your business is an S Corp, pay yourself a reasonable salary that reflects your duties and industry standards. This ensures you’re contributing sufficiently to Social Security and Medicare through FICA taxes.
- Understand self-employment taxes. If you operate as a sole proprietor or partner, you pay self-employment taxes, which cover both the employer and employee portions of Social Security and Medicare taxes. Consistently reporting healthy earnings helps build your Social Security record.
- Check your Social Security statement. You can view your estimated benefits by creating an account on the Social Security Administration (SSA) website. Reviewing your statement annually helps you track your progress and understand how your current earnings impact your future benefits.
Treating Social Security contributions as an investment in your future, rather than just a tax burden, is crucial for a well-rounded retirement plan.
Mistake #3: Assuming You Must Sell Your Business
For many small business owners, the default exit strategy is selling the company. The idea of a single, large payout is appealing, but it’s not the only option. Believing you must sell can blind you to other, potentially more beneficial, succession plans. An all-or-nothing approach can be risky and may not align with your personal or financial goals.
Alternative strategies can provide a steady income stream, keep the business in trusted hands, and allow you to maintain a connection to the company you built.
Exploring Alternative Exit Strategies
Consider these paths beyond a traditional sale:
- Retain ownership with a profit-sharing plan. You can step back from daily operations while retaining ownership. By promoting capable managers from within, you can incentivize them with a profit-sharing arrangement. This keeps your key team members motivated to ensure the business thrives, providing you with a consistent income stream.
- Gradual sale to family or employees. A phased buyout allows you to gradually transfer ownership to family members or key employees. This can be structured over several years, giving you a steady income and ensuring a smooth transition for the business.
- Become a passive owner or consultant. You can transition into a less demanding role, such as a board member or paid consultant. This keeps you involved in strategic decisions without the stress of day-to-day management, all while earning an income.
The key is to build a business that can operate successfully without you. By developing strong systems and a capable management team, you create options for your retirement.
Mistake #4: Relying Solely on Selling Your Business
Even if you plan to sell, counting on that one event to fund your entire retirement is a high-stakes gamble. The market for small businesses can be unpredictable. Finding the right buyer with adequate financing is not guaranteed. Many potential buyers may only offer a small down payment and a promissory note, tying your financial well-being to the business’s future performance under new leadership.
If the business struggles after the sale, your payments could be at risk. This is why diversification is just as important for your retirement plan as it is for an investment portfolio.
Diversify Your Retirement Income Sources
Protect yourself by building multiple streams of retirement income.
- Invest in retirement accounts. Take advantage of retirement plans designed for small business owners, such as a SEP IRA, SIMPLE IRA, or SIMPLE 401(k). Contribute consistently to these accounts throughout your career to build a nest egg that is separate from your business.
- Build a personal investment portfolio. Outside of formal retirement accounts, invest in a diversified portfolio of stocks, bonds, and real estate. These assets can provide income and growth independent of your business’s success.
- Plan for contingencies. What happens if you can’t sell your business for the price you want? Or what if you’re forced to sell earlier than expected due to health issues? Having a diversified plan provides a safety net against these uncertainties.
Your business is likely your largest asset, but it shouldn’t be your only one. Spreading your risk across various investments helps ensure you can retire comfortably, no matter what happens with your company.
Take Control of Your Retirement Today
Running a small business is demanding, but securing your financial future cannot be an afterthought. By being aware of these common retirement planning mistakes for small business owners, you can take proactive steps to build a resilient and reliable plan. Start by creating a retirement budget, strategically contributing to Social Security, exploring all your exit options, and diversifying your assets.
The planning you do today will determine the quality of your life tomorrow. Don’t wait to get started. Consider consulting with a financial advisor who specializes in working with entrepreneurs. They can help you navigate the complexities of retirement planning and tailor a strategy that aligns with your unique circumstances and goals. Your future self will thank you.
