Retirement Planning Tips for Small Business Owners

Many self-employed contractors never truly retire. The bittersweet reality of being self-employed is having full access to your company’s entire cash flow. When managing material costs, deposits, employee pay, and everything else that happens within your own business’ account, retirement planning often is overlooked. What typically makes retirement planning harder as a small business is not having an HR staff or having payments taken before your paycheck arrives. Often, contractors believe saving for retirement is too expensive as a business owner. Luckily, there are plenty of ways you can start planning for retirement that shouldn’t require too much money or time sacrificed from you as a business owner.

Most people have a personal goal and age of when they want to retire. Regardless of age, consulting with a financial advisor is extremely affordable (usually free) and the best way to go over planning for a self-employed retirement. Having a professional steer you in the right direction can be really helpful since retirement options look a little different for self-employed business owners than for employees of large companies or corporations.

One of the easiest options is a Traditional or Roth IRA. This is the most affordable option, in my opinion. An IRA has a $6,000 contribution limit that can be tax-deducted when set up as a traditional account. The benefit of an IRA is the tax-deferred savings account that can grow in stocks, bonds, or other assets of your choice. A $5,000 a year contribution ($416 per month) would grow into $372,000 with an average of 7 percent return over 25 years. While every individual’s retirement amount is different, an IRA can be a great step toward your goals. There are countless advisors and companies that can set up an IRA for almost no cost, which also can come in handy when preparing your yearly tax bill.

Another option is the mythical 401(k). This is best for contractors with no W-2 employees. A 401(k) has a much more aggressive contribution limit at $57,000. As a simple savings account, a 401(k) has contributions added pre-tax, and after you reach 59 ½ years old, the money you can pull from this account is taxed. The main advantage to any savings account is time and interest accrual. The longer you can allow an account to accumulate compound interest, the larger your account will grow. A $10,000 yearly contribution after 20 years at 7 percent is almost $410,000. The total interest earned is about $200,000. If you’re able to give that savings account another 5 years, it will reach $632,000. Again, the most important goal is investing early and often to reap long-term benefits.

Another option is real estate. The upfront cost is higher, but long-term, you gain an appreciating asset, a fixed monthly income, and an asset you can leverage into more properties. As a flooring contractor, there are a few approaches to real estate. One individual option is to purchase a storefront location and create it as a part of your long-term retirement plan.

If you can grow and maintain a storefront location for 30 years, you now have an opportunity to sell the building or sell the business to get over the last hump into complete retirement. With residential property, you typically will need 20 percent down (10 percent being the bare minimum) to achieve positive cash flow. While this varies in different markets, the same annual contributions in a savings account can be saved to leverage adding rental properties to a portfolio. Owning investment property, whether commercial or residential, comes with added expenses due to maintenance and managing fees (managing multiple properties while also being a business owner can be a lot to handle), and some markets are friendlier to investors than others. If you live in an area with a hot rental market, this can be one of the quickest ways to set yourself up for retirement because the property often cash-flows before the mortgage is paid off.

Because everyone’s goals and starting points are so different, I personally believe everyone’s path to retirement should be catered to the individual’s preferences and lifestyle. I have a plan using a combination of these instruments to help achieve my target date of retirement. The most important thing I consider is establishing the habit of putting away a specific sum of money each month to help reach my goals. Though it can feel like a large sacrifice to put away money for retirement, I know that it will be worth it when I reach my retirement goal at my desired age. The times are difficult now, but I believe that if you can prepare for your retirement, you should.

Of course, there are several instruments not mentioned here that are equally useful in reaching retirement. Additionally, employment paths and life situations inevitably change as time goes on. At the end of the day, a penny saved is a penny earned, and you will thank yourself for each one down the line. One of the simplest ways to help save overall come tax season is to meet with a CPA and financial advisor to help fully understand your taxes at the end of the year. Often, there can be ways to fully maximize your money by knowing which specific advantages make sense for you. Be aware, some savings accounts have cut-off dates before the end of the year, so it is never too early to start thinking and getting educated about retirement.

Travis Fritzel is the Owner/Operator of Perennial Hardwood in Fort Collins, Colorado. He can be reached at travisfritzel@perennialhardwood.com.

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