Let me cut right to the chase: Selling a business is not a retirement plan. Yet, too often, it’s the only plan business owners seem to have. They pour everything into the growth of their companies while shoving personal retirement savings to the bottom of the to-do list. They expect that when they put a “For Sale” sign on the door, someone will come to write them a check that will finance the rest of their lives. It just doesn’t work that way. You can (and really should) save for retirement and grow your business at the same time.
First, let’s address the faulty confidence that the sale of the business will be enough to fund retirement. Why isn’t it enough? The issue stems from faulty valuation. Many business owners fail to get proper periodic valuations of their businesses and, as a result, overestimate what their companies are actually worth as well as the ease of selling or converting that value to an income stream for retirement.
In other words, selling a business and getting enough money for it to finance decades of retirement just isn’t that easy, so it can’t be your safety net.
More than a third of business owners have no retirement savings plan in place, according to a 2017 Manta survey of roughly 2,000 small business owners. Nearly one in five of those surveyed are banking on funding their retirement by selling their business. So, if you’re a business owner who hasn’t been saving, you’re not alone, but it is time to get moving on a real retirement savings plan that can provide you the funds you’ll eventually need without taking your immediate focus off the growth of your business.
Here are 3 simple steps you can take right now to save for retirement and grow your business at the same time:
- Think of retirement in “the now”.
Business owners have a natural tendency to prioritize the here and now -- put out this fire, answer this email, make this meeting -- because the everyday needs of the business are just so pressing. Thinking of retirement savings in the same way, “in the now”, can help you prioritize it.
Focus on the short-term benefits of putting away retirement savings this year: Investing in a pretax retirement plan immediately lowers your taxable income. It also provides quick access to cash should you need it. With an IRA, for example, you can borrow against your own savings-- penalty-free --provided you return the funds within 60 days. With a 401(k), you can often take a longer self-loan and make repayments without interest. How handy would that be if you had to make a sudden purchase or cover payroll in a jam?
Beyond that, lenders love to see retirement savings -- assets beyond what the business currently holds in checking. You’ll see much more favorable interest rates (from refinancing your home to getting a business loan) if you have some retirement savings banked.
- Automate your savings.
It’s easy to look at an empty retirement account and think you’ll never fill it up because the amount of money you need is just too great to impact with small contributions. At that point, it’s very easy to put off saving altogether.
Automating retirement payments forces you into savings. It’s that easy. It’s the difference between, “Yeah, I’ll get to it,” and, “I’m on it.”Think of all the companies that bill you monthly: your gym, your meal delivery subscription box, your cable provider. The list is endless. They do this because they know that small monthly charges don’t make you feel bad and will keep you on the membership roles. If we faced those charges once a year, we’d all flip out and cancel our memberships. Spending a lot of money just hurts like that. It’s easier to swallow the charge when it’s small and automatically removed from our bank accounts.
Follow that lead. Automate recurring debits from your checking account into your retirement account. The small amounts will add up over time, and you’ll be less likely to feel the impact on your bottom line and give up on saving.
- Lean on a qualified accountant.
The questions before you as a business owner are dizzying: Does it make more sense to open an IRA or a SEP-IRA? If you start a company 401(k), do you have to include all employees in the plan and offer them all the same match, or can some be excluded? Which plan will offer the best tax benefits? There are a lot of factors to consider in your decision.
A qualified accountant (qualified meaning steeped in business and personal financial advisory matters) can help you see how your retirement savings will impact your business year by year and how they will shape your entire financial future.
With focus, you can save for retirement while not giving up on the immediate goal of growing your business. We’re here to help you get started.