The prospect of retirement often raises a plethora of questions for business owners. This uncertain period, however, presents a golden opportunity. When retiring, they can liquidate their business and merge the proceeds with their accumulated retirement fund, provided they've been consistent with their savings.
Still, some business owners find out, rather too late, that they haven't thought their post-business life through. Unlike traditional employees who earn pensions or have 401(k)s, entrepreneurs grapple with the challenge of saving for their retirement while concurrently fostering their business and formulating exit plans. They also have to draft a tax-efficient retirement savings withdrawal plan that syncs with their business exit and retirement plans to ensure they achieve their personal and professional targets.
The key is understanding personal retirement goals. Whether it's travelling the world, supporting loved ones, or funding a purpose, it becomes easier to create a financial blueprint that is not entirely reliant on business sale revenue. Setting retirement targets based on these visions and simultaneously growing the business and adding to savings goes a long way.
According to Christopher Stroup, founder of Silicon Beach Financial, many business owners mistakenly inflate the value of their businesses and procrastinate saving outside it. He underscores the essence of treating business and personal aspirations as "two parallel lanes." Developing a robust saving plan guarantees that retirement is by choice, not coerced by business circumstances. Chris Diodato of WELLth Financial Planning echoes Stroup's sentiments, emphasizing the need for business owners to earmark some funds for retirement savings.
Business proprietors have several appealing retirement savings platforms at their disposal. SEP IRAs and Solo 401(k)s are optimal for solo entrepreneurs, boasting high contribution ceilings and low costs. By 2025, individuals can inject up to $23,500 into a Solo 401(k). Justin Pritchard, founder of Approach Financial, asserts that for self-employed individuals, a personal 401(k) often ranks as the most attractive option. This plan permits choosing between pre-tax and Roth contributions and proffers other benefits like plan loans and mega backdoor Roth schemes.
For businesses with a workforce, typical choices are SIMPLE IRAs and classic 401(k)s. However, Diodato alerts that SIMPLE IRAs limit ambitious savers with low contributions ceilings and often recommends SEP IRAs for their straightforwardness. As a business owner, selecting a plan necessitates the consideration of flexibility, team requirements, and contribution objectives.
Without an exit strategy, entrepreneurs risk hurried sales or settling for less than their business's value. Stroup advises starting exit planning three to five years before departure. This includes calculating a reasonable business valuation, creating a clear succession or sale strategy, and deciding the preferred timeline for retirement.
Farsighted exit planning maximizes business sale prices, minimizes tax hurdles, and guarantees client satisfaction. Whether the business is sold to employees, competitors, or family members, early planning dictates the terms of departure and ensures peace of mind.
To navigate this complex landscape, it's advisable to consult with professionals. When selling a business and tapping into retirement funds – both taxable events – forward-thinking can ease the tax burden. Spread sale income over several years, use installment sales, or structure deals smartly to reduce taxes, advises Diodato.
Post-retirement, strategic Roth conversions and tax-efficient withdrawals help to preserve wealth. Be cautious with traditional individual retirement accounts (IRA) that mandate minimum distributions (RMD); take just enough to scale down tax obligations and allow more wealth to expand tax-free. Collaborating with a financial advisor refines specifics like retirement age, when to access Social Security benefits, and how to prevent outliving savings.
Being a retiree business owner is not solely about selling at the right time but careful planning, prudent saving, and flexibility. Starting building personal retirement savings early, selecting the right retirement account, consulting with a trusted advisor, and establishing a clear exit strategy promotes secure and confident retirement.