You Will Thank Us Later – 5 Tips to Create a Retirement Plan for Entrepreneurs

5 Useful Tips on Retirement Planning for Business Owners

Most working class Americans are employed by companies that either require or offer retirement savings options in the form of a 401(k), 403b), or pension plan. Because these contributions are automatically deducted from the employee’s paycheck, saving for retirement tends to be a rather painless process. Over time, the cumulative effect of regular monthly contributions leads to a nice sized nest egg that can be used in the retirement years.

But for entrepreneurs, the story is a little different. With no steady paycheck or employer-sponsored plans, many of these hardworking individuals forgo retirement contributions.  And though it may not seem like a big deal in the early years, this misstep can prove to be dangerous and irresponsible as entrepreneurs age.

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Entrepreneurs and Retirement: Troubling Data

Millennials catch a lot of flak in the financial planning world for not saving nearly enough money for retirement, but they aren’t the only segment of the marketplace that’s coming up short. According to a survey by Manta, an online community for small business owners, entrepreneurs are falling behind.

Research from the Manta survey suggests that 34 percent of entrepreneurs don’t currently have any retirement savings plan – even though 60 percent say they plan on retiring before the age of 65. And of those that do have retirement savings, the majority are significantly underfunded according to their age and retirement goals.

The question is, why are entrepreneurs failing to give retirement the attention it deserves? Here are a few of the more pertinent factors:

  • Putting everything into the business. According to the Manta survey, 37 percent of entrepreneurs say they don’t make enough profit to save for retirement. Of the profit that these entrepreneurs do make, they’re pouring most of the funds back into the business to build and grow. This is smart, to a degree, but can eventually set a well-intended entrepreneur back.
  • Laziness (a lack of planning). Some entrepreneurs are simply lazy. They view retirement planning as some complicated process that requires lots of meetings, micromanagement, and constant attention to market performance. This perception – as flawed as it is – discourages many from sitting down and developing a plan.
  • Planning to sell the business. Right around 18 percent of entrepreneurs plan to sell their business to fund their retirement. Unfortunately, most business owners overestimate the value of their companies and don’t account for how challenging it can be to find a buyer. (Not to mention companies frequently fail, which can leave an entrepreneur without any assets.)
  • No plans to retire. Believe it or not, 12 percent of entrepreneurs say they have no plans to retire. And while this may be true for some, health issues and dwindling motivation ultimately force most people to clock out for good.
  • Don’t see the need. A small segment of entrepreneurs see no value or need in saving for retirement. They’d rather spend their money now and wing it during their final years. Most of these individuals assume that Social Security will cover their needs, even though it’s rarely enough to survive on.

How Much Should Entrepreneurs Save for Retirement?

Saving for retirement is important. It provides financial security in the latter years of your life when you may be unable or unwilling to work. For some, retirement savings are enough to provide opportunities like traveling or exploring new hobbies. For others, the money is needed to fund healthcare expenses or pay off debt.

There’s no specific amount that’s regarded as the perfect retirement number. How much you need to save depends on your personal circumstances, goals, needs, hopes, and dreams. But there are some rules of thumb you can use to determine a ballpark number.

“For example, two pieces of common advice are to save at least 10 percent of your income while working and withdraw 4 percent from your retirement savings annually during retirement,” RISE mentions. “There are also milestones that try to simplify the answer, such as having your annual earnings in retirement savings when you’re 30 and six times your annual income in retirement savings once you’re 55.”

But, again, these are oversimplified suggestions. There are countless factors that determine what you need to have saved up. One person retiring at age 60 may be able to make do on $750,000, while someone else retiring at age 70 may need $2 million. Health needs, insurance, and lifestyle factors all need to be carefully considered and projected. It’s for this reason that it would be smart to meet with a retirement planner or financial advisor – even if just one time.

5 Useful Tips on Retirement Planning for Business Owners

Just because you’re an entrepreneur without an employer-sponsored plan, doesn’t mean you can’t save for retirement. In fact, it means you need to be even more disciplined and vigilant with tucking away money for the future.

Fortunately, saving for retirement doesn’t have to be a monumental feat or a significant source of frustration. Using the following tips and techniques, you can begin to set things into motion.

1. Know Your Options

The first step is to understand your options. While you don’t have access to an employee-sponsored fund or pension plan, there are plenty of investment products for self-employed entrepreneurs. Some of the more popular include:

  • Roth IRA. With a Roth IRA, you invest after-tax money into an account that’s tax-free upon withdrawal. So while you don’t get a tax break now, you potentially save tens of thousands of dollars at retirement. For those under 50, maximum contributions are $6,000 per year. If you’re over 50, you can contribute up to $7,000 per year.
  • Traditional IRA. A traditional IRA has the same rules and contribution limits as a Roth IRA, but uses pre-tax money. This allows you to reduce your tax bill in the contribution year, but also requires you to be taxed upon withdrawal. (It should also be noted that the total contribution to your traditional and Roth IRAs cannot be more than $6,000 total. For this reason, most people contribute to one or the other.)
  • Solo 401(k). IRAs are the easiest, most hassle-free way for entrepreneurs to invest. But if you want to invest more than the maximum of $6,000 per year, you should look into a Solo 401(k). Valid for business owners with no full-time employees, a Solo 401(k) allows you to contribute up to $50,000 of pre-tax business income per year.

There are a handful of other retirement products as well, but simple is sometimes best. Start with one of these (or a combination) and go from there.

2. Slow and Steady Wins

Albert Einstein famously called compound interest the most powerful force in the universe – and it would be hard to argue otherwise.

As this chart shows, you don’t have to invest a lot of money to become wealthy in retirement. Rather, it’s a slow and steady climb. For a 25-year-old entrepreneur to accumulate $1 million by retirement age, she would only need to invest $241 per month (assuming a rather conservative 8 percent average rate of return).

3. Create a Budget

Different rules of thumb say how much money you should put aside for retirement, but most financial advisors suggest somewhere between 10 to 15 percent of every paycheck. To do this with consistency, you’ll need to develop a monthly budget that keeps you disciplined and on track.

Using your budget, you’ll be able to determine how much you can realistically invest while still covering monthly expenses, existing debt, and other needs. And with this amount, you can then set up automatic monthly deductions that streamline your investing and make it as hands-off as possible.

4. Diversify

Within your IRA or Solo 401(k), you’ll have to determine exactly what you’ll be investing your money in. Regardless of what anyone tells you, it’s unwise to be investing in individual stocks. You’re far better off spreading out your risk by making investments in a variety of mutual funds.

“If you follow what I teach, you know you want to invest in good growth stock mutual funds and spread your investment across four categories: growth, growth and income, aggressive growth and international,” retirement expert Chris Hogan writes.

You may or may not agree with Hogan’s exact approach, but you should be diversifying to a degree. Come up with a plan and be sure to spread out your risk.

5. Keep Your Hands Off

Finally, keep your grimy hands off your retirement account! You’ll be tempted to pull out money or move it around when the market dips – or to buy a bunch when the market is booming – but don’t! Regular investments in both bull and bear markets will ensure you get a healthy rate of return. (And never withdraw prematurely! The penalties, fees, and taxes aren’t worth it.)

Do You Have a Plan?

Saving for retirement may seem complicated and time-consuming on the surface, but it doesn’t have to be. With a disciplined plan in place, you can develop a strategy that sets you up for success over the long haul. At this point, you’ll only need to check in a couple of times per year to evaluate, tweak, and make necessary adjustments.

Don’t be part of the 34 percent of entrepreneurs who lack a retirement savings plan. Be purposeful and diplomatic with how you handle your financial future. You work hard and owe it to yourself to be smart.


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Larry Alton Larry Alton is an independent business consultant specializing in social media trends, business, and entrepreneurship. Follow him on Twitter and LinkedIn.

2 Reactions
  1. It takes a little time to set up your Roth IRA/Traditional IRA but once it’s set up you can easily contribute (even via automatic bank drafts) so that it become just as “automatic” as employees with their 401(k) accounts.

  2. Hey Larry,

    I think one point that was slightly touched upon, but mostly missed is the idea that entrepreneurs might also feel investing in their business ventures is a better investment than a lot of the retirement options that are available. You touch upon it kind of in the first point, but it was more of a negative “they’re dumping their money in their business because they have to” slant.

    I fund a Roth IRA in a globally diversified set of index funds, and sometimes it’s a bit painful to look at the growth of 6 – 15% and know if that money had been otherwise invested in my business, it would have increased 200-300%.

    Of course, I can’t guarantee those kinds of returns always and the risk of loss is higher. I do enjoy how hands-off the gains are in the IRA, which is why I continue to fund it. While retirement investing may be a no-brainer to an employee who has limited income growth and isn’t actively building an asset, the opportunity cost calculations are a lot simpler.

    When looking at entrepreneurs, the opportunity costs of being invested in a traditional stock/bond IRA versus investing in their business ventures might be significant. I also might be limited out in the next couple of years, so I need to work with an accountant to figure out what to do either do backdoor contributions, or see what other retirement investment alternatives there are.

    I obviously can’t speak for many people, but I did want to add this nuance as I know I’m not the only one considering the opportunity cost of stock investment vs investing in our own ventures. Thanks for the interesting read.

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