Saving Money

Why small business owners need to start planning for retirement now

Business owners face hundreds of challenges each day, all of which seem urgent and raise alarm bells. Rising cost pressures, supply chain disruptions, problems with manufacturers, and hiring new talent, are all things to take into consideration when deciding to expand your business or take a more conservative approach. On today’s episode of Money Talks, host Tiffany Kent, Certified Financial Planner and Founding Partner of Wealth Engagement, LLC, discusses how these components factor into retirement planning and saving for your financial future.

Transcription: 

Tiffany Kent:
My name is Tiffany Kent, and I’m a certified financial planner and investment manager and a business owner. On top of everything else, there are so many and seemingly complex things that you can get wrong when it comes to saving for retirement, so that many business owners don’t even know how to get started. So a lot of them never do and retirement savings remains on their to-do list for years without them ever taking action. That mentality leaves some business owners in a horrible spot when they retire, especially when they’ve been banking on getting some big proceeds from the sale of their company.

Tiffany Kent:
Whatever you do, don’t avoid at saving for retirement. I have several clients who put their head in the sand and now in hindsight really regret not dealing with saving and investing for their financial future. And the crazy thing is that they had the money, they just didn’t know how to get started. Here’s an example. A woman who had a business, which earned around $10,000 a month after tax had no mortgage on her home, spent the profits. Now the business has closed and she has no retirement account. She is having to sell her house to support her lifestyle.

Tiffany Kent:
Had she just saved $2,000 a month for the last 20 years and invested it, she would’ve had well over a million dollars in her retirement account. Instead, now is having to sell her house because now the only income she has is Social Security. However, as much as she might regret not saving for retirement during those 20 years, the real issue is people need to have an awareness and perspective on his or her lifestyle. Having enough for retirement is dependent on your personal values of what person’s willing to live with and live without. And it’s essential that you start as soon as you can and save as much as you can early in your career so you can take maximum benefit of compounding growth of your retirement money over the decades that you work.

Tiffany Kent:
It can make the difference between living a comfortable retirement that supports your lifestyle wishes or having to cut corners and sell the house and find other ways to make every dollar stretch as far as possible. First of all, business owners need to recognize that saving for retirement is much harder for them than for corporate employees. Employees of large corporations just have to sign a few papers with HR, enroll in the company 401(k) plan, choose an amount of their contribution and the company matches possibly automatically.

Tiffany Kent:
They choose from a pre-selected list of funds and investment options, click a few buttons and boom, they’re all done, set it and forget it. The employer withholds the contribution from each paycheck, deposits it into the 401(k) account and handles all the retirement account compliance and administrative and paperwork stuff. And many employers make a 401(k) match as part of their benefits package, which is like free money for employees. But if you’re a business owner, you need to do all of that stuff by yourself and more or you can hire a financial advisor to help you sort out all the different options available to you.

Tiffany Kent:
First, you have to pick the right kind of investment account for your business. There are a bunch of options like 401(k)s and IRAs that most people are familiar with. And some are very specific to sole proprietors or business owners who don’t have any employees besides themselves. Another massive thing is that you have to make sure your accounts stay compliant with federal and state laws. Adding even more complexity is the fact that these compliance rules and requirements can change as your business grows and employees more people, or if it changes corporate structures like going from an S Corp to a C Corp or if it merges with another company.

Tiffany Kent:
All these options have both freedom and constraints, pros and cons. Seeking professional advice about the tax implications and other compliance issues is also wise from your CPA. As a certified financial planner, investment manager and business owner, one of the best parts of my job is coaching other business owners through these complexities and decisions and working with your CPA. The downside is that all of these complexities and the plethora of options can create a paradox of choice or as we like to say on Wall Street, analysis paralysis. Taking that first step becomes crucially important.

Tiffany Kent:
There are some things business owners can do to get started on save for their retirement. 1. Take baby steps. It’s complicated to save for retirement and there are a ton of options and decisions to make. So start simple, do some research, talk to friends who are also business owners to learn about what they have implemented and seek guidance from a professional financial planner who can educate you on the pros and cons of different types of plans and investment vehicles. And also talk to your CPA.

Tiffany Kent:
If you’re not sure how much you can afford to invest for retirement, take the interim step of putting a few hundred dollars away a month in a savings account and then transferring into a retirement account once per quarter. Once you’ve gained confidence that you can still run your business without the money, earmark a little more and a little more until you’ve reached the maximum amount allowed by law.

Tiffany Kent:
2. Bank retirement savings into your business plan. Each year when you update your business plan and make financial projections for the coming year, create a special line item for your retirement savings. As you’re thinking about how much revenue you need to make to turn a profit and cover your overhead and expenses to run your business, treat retirement savings just like any other routine expense like office rent or payroll. Aim to save 20% of your compensation or the maximum allowed depending on your age and circumstances.

Tiffany Kent:
Generally that’s 19,500 per year for 401(k) plans, which for most people is way too little for them to support their lifestyle in retirement so you’ll have to invest your hard-earned cash. If you don’t know how to get started, the quickest and easiest way is to hire a financial advisor. We will talk about this a little bit later on the.

Tiffany Kent:
3. Make an employer contribution. Meet with your accountant or certified financial planner to talk about the most tax advantageous ways to save for your retirement. Some plans and instruments available to business owners allow them to save even more. For example, I have a friend who owns her own S Corp small business and she is the only employee as well as the sole owner. She pays herself a salary and withholds much of it for her taxes and employee contribution of 19,500 per year. She created a special kind of 401(k) called a simplified employee pension IRA or a SEP IRA that allows her company to make an employer match equal to 25% of the W-2 wages she pays herself and it adds up.Her company is a generous employer and has kicked in $10,000 to her SEP IRA each of the past couple years, which is a 50% boost on her yearly retirement savings.

Tiffany Kent:
4. Talk to your account and financial planner. Different kinds of a retirement accounts have various tax benefits, contribution rules, limits and other things that might not be a good fit for you. Just because you read an article about how awesome Roth IRAs are, that doesn’t mean they’re the best option for your circumstances. Meet with your accountant and your financial planner to learn more about all the options and ask about the tax benefits, early withdrawal penalties, just in case that becomes necessary and other factors that might be important down the road.

Tiffany Kent:
It’s possible that some combination of retirement accounts and a personal investment account might be the right fit for you. Unlike retirement accounts, a personal investment account, which you can open up at a retail brokerage firm gives you the flexibility of being able to make withdrawals without penalties, but there are capital gains, taxes and other tax implications for non-retirement accounts. You can also roll over other 401(k)s and retirement accounts into a rollover IRA. Consolidating your retirement accounts into one place makes it easier to manage and oversee them. And it can also save you a lot on costly administrative fees that some plans charge when you’re no longer at actively contributing to them.

Tiffany Kent:
There’s a right way and a wrong way to do these things, which brings me to number five, know when to hire a financial advisor. Clearly there are some complex choices to make with all the options you face. And when your savings or your wealth reaches a certain amount, it’s a good idea to hire a certified financial planner for your personal investments to take advantage of their professional advice and guidance. This is literally what we do for our living and we’re really good at it.

Tiffany Kent:
If you’re opening a business retirement account and have employees, you definitely need a financial advisor or some third party administrator or an investment group at your payroll company to oversee the plan you’re offering to employees. They can also administer the plan and manage compliance for you. There are a bunch of compliance requirements, including ERISA and fiduciary requirements. And any fees you pay for these services are minimal and are well worth it compared to the potential cost of facing audits or lawsuits if you botch things while trying to do it yourself.Hire an expert and rest easy that you’re in good hands.

Tiffany Kent:
Now here’s some homework for you to do. If you’re a business owner and you’re just getting started on your retirement savings, start small by putting a few hundred dollars a month aside in a savings account to get comfortable and confident with the idea that you can run the business and you won’t miss that cash.

Tiffany Kent:
A friend, now client who owns her own business, which makes three million a year and her husband who also works full-time, they had let their excess cash accumulate their savings account to the point it reached $700,000. Frustrated, the wife called me because their cash is earning 0% and we invested their cash in low cost ETFs and their excess cash has now made money, first making zero money in the bank account. Your financial planner can also help you create a customized roadmap that meets your exact needs and ensures you’ll have a comfortable retirement.

Tiffany Kent:
In sum, if you’ve been in business for a while, you are already probably sitting on a lot of cash. I know because several of my clients are like you. I know it can be scary to invest your hard-earned cash, but a professional like me knows how to leg into the stock market, manage risk and diversification so that your nest egg is invested for long-term growth so that you can enjoy your days in retirement. So I hope that was some helpful advice. I’m Tiffany Kent and I’ll see you next week.


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