According to the most recent Retirement Confidence Survey by the Employee Benefit Research Institute, a mere 14% of respondents stated that they felt confident in their ability to retire comfortably. With all the economic and legislative uncertainty that keeps swirling around, it’s little wonder why. But for the owners of the smallest of businesses and the self-employed in particular, this trepidation can more easily lead to inaction. After all, there are no matching employer contributions, there may be a smaller available asset pool, and the price tag on the most lucrative retirement plans may make them prohibitive.
Yet it is precisely these small business owners and self-employed professionals who have the most leverage and control over their retirement funds, and when used properly that can be a very good and powerful thing. The following are the top ten retirement planning do’s and don’ts for those who own a small business and/or are self-employed:
1. Do conduct a financial assessment to determine your current needs. Before you can start looking to the future, you need to get a realistic picture of your current income and financial obligations. This may sound pretty basic, but many people skip this step and cause themselves unnecessary head ache and heart ache down the road. This process will help you to determine how much you can afford to sock into your retirement accounts. Are you considering all sources of income- both current and potential? Are there expenditures that you can comfortably cut?
2. Do research all your options for tax-deferred savings. Small business owners and self-employed individuals generally choose one or more of the following qualified retirement accounts: the Simplified Employee Pension Plan (or SEP), a traditional IRA and Roth IRA account, a Self-Employed 401(k), and finally a Keogh Retirement Plan. Keep in mind that many programs will charge you a whole host of administrative-type fees that can easily whittle away any interest that you are earning, so make sure you read the fine print.
3. Do hire an accountant or a qualified financial adviser. With all the qualified retirement plans and programs out there, you may find it difficult to decide which ones to go with. Or you may have very specific questions about how and when you should move your money- both within your business as well as within and between your retirement accounts. The answers to such questions cannot come on the fly since your situation is unique to you and may consist of numerous variables. Thus, it is extremely important to get the expert advice and assistance of a qualified financial consultant, CPA, or lawyer. Ideally, this person will sit down with you, take a look at all of your details, and then give you a customized financial analysis, complete with a recommended, actionable to-do list.
4. Do seek financial management education. But merely relying on the advice of a financial professional is not enough. You should make it a point to get educated about the various financial products that exist today and how they are designed to work for you. You should also seek to understand how invested money grows as well as the main risks attached to that growth. Finally, you should also become an expert in the fine art of budgeting. Effectively knowing what to cut versus what to leave in can be a real challenge that takes a combination of savvy, know how, and a bit of forward thinking.
5. Do seek out multiple streams of income. While seeking multiple income streams may not be such a new concept, it is particularly vital if you are in business for yourself. According to a widely quoted statistic from the U.S Small Business Association, the majority of small businesses will not last past five years. If your business does not work out or goes through a slump, then you need to have a backup plan. As a side note, in addition to getting outside sources of income, you should also consider any untapped sources of income within the business itself. By this I mean actions such as leasing out any unused property or equipment or seeking affiliate-type business partnerships.
6. Do not mix personal and business finances. When it comes to finances, your professional and personal lives shouldn’t mix. This means separate financial accounts, reports, credit cards, and loans. As a sole proprietor, if your business ever gets into financial trouble or becomes the target of a lawsuit, then you could suffer claims on your personal assets such as your bank account, your home, and even your retirement accounts. In many cases, operating your business as a Limited Liability Company (LLC) or a corporation may make much more sense. Just make sure you ask the advice of a financial professional before committing yourself to a particular business structure. A single member LLC, for example, may not necessarily offer personal asset liability protection.
7. Do NOT use your retirement accounts to fund your business. I repeat, do not tap into your retirement funds! And I know may be this is your only source of funding and retirement may be many years off. But this is a very big no no! I personally know people who have done so, and in almost every case they regretted it. Tapping into your retirement funds carries a very great, obvious risk that increases exponentially the older you are. If you don’t have access to other, less risky assets to fund your business, then you shouldn’t be in business in the first place. Period.
8. Do not carelessly invest non-retirement funds into your business. That said, you should also exercise caution when investing any other personal assets, such as savings or taking out a home equity loan (if you can even get one these days), into your business. Reckless spending could eventually lead to financial hardship and affect both your ability to live comfortably now and in the future.
9. Do not underestimate what a little savings can do. Oh the wonders of compound interest! Socking away a few hundred dollars a month may not seem like much now. But with time and compound interest it can grow into a sizable nest egg. The biggest thing to remember is that you shouldn’t get discouraged or overwhelmed if your monthly contributions are small or inconsistent. There are times to look to the future and times when you shouldn’t, and in many cases, there may be means at your disposal to increase the amount of money you have to contribute.
10. Do not stop evaluating your position. There is no universal path to retirement planning because every one is faced with their own unique situation, and different circumstances require different actions. The same can be also said for the different periods within a person’s life. What you do with your money will look very different at 25 then what you do at 45. Other life changing situations, such as an unexpected health issue or a career change, can also significantly affect your retirement planning.
Herein lies the crux of the matter: retirement planning is an active endeavor. While you may be able to put some aspects of it on autopilot, as a whole, you need to be both alert and in the driver’s seat so you can be in the best position to steer your ship through the turns and obstacles along the way. As a small business owner or a self-employed individual, you’ve already made the decision to take the reigns on your own life. Now it’s up to you to it move forward in the most opportune paths.