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Don't bank on your business to fund your retirement

Retirement can loom like a dark cloud for small-business owners. Many invest blood, sweat and tears — and every penny — into building their business but never set cash aside for the future.

A huge number of entrepreneurs have reported putting aside no retirement savings at all. For some, selling the business is their only retirement plan.

That’s a risky bet, says Keith Hall, president and chief executive officer of the National Association for the Self-Employed.

“You’re putting all of your eggs in one basket. Not just your current lifestyle, but your future,” Hall says. “If something goes wrong, you sacrifice both.”

The list of things that could go wrong is long: Your business could fail. Your health could fail. You may not find a buyer. You may have to sell for less than you need.

Rather than gamble on everything going right, diversify your nest egg so it will last you well into your later years.

Make retirement planning a priority

Make saving for retirement  as important as paying your mortgage or running your business, Hall says.

“It’s hard as an entrepreneur and small-business owner to think 20-plus years out,” says Mary Bell Carlson , owner of Carlson Consulting LLC. “I’m often figuring out what I need to do today for immediate cash and long-term profitability.”

But Carlson makes a point to invest where she can.

“My biggest lesson has been to start, no matter how small the amount; it’s just important to start,” she says.

Determine what you can afford, whether that’s 1%, 5% or 10% of your gross earnings, and commit to it, Hall says.

There are a number of retirement plans for small-business owners, each with requirements, stipulations and tax implications.

  • TRADITIONAL, ROTH IRA: Individual retirement accounts are easy to open and available to virtually anyone. You can contribute up to $6,000 in 2022 (up to $7,000 if you’re 50 or older). The main difference between traditional and Roth IRAs is whether you want tax savings now (traditional) or later (Roth).
  • SOLO 401(K): Available to business owners with no full-time employees (exception made for a spouse). The contribution limit is up to $61,000 for 2022, though that’s broken into two parts, each with limits. Similar to an employer-sponsored 401(k), contributions are pre-tax and withdrawals are taxed as income.
  • SEP IRA: A Simplified Employee Pension IRA, or SEP IRA, operates much like a traditional IRA, except you can contribute a lot more. Annual contributions are capped at $61,000 in 2022. Another key difference: If you put money into your own SEP IRA, you must contribute an equal percentage to employees.
  • SIMPLE IRA: This option has a lower contribution limit, up to $14,000 in 2022 (for those under age 50), but it offers employee accounts and is easier for small companies to administer than a traditional 401(k). You must offer a 3% match or a blanket 2% contribution to all employees. You can deduct contributions made to your account and those made on your employees’ behalf.

Talk to a professional

You can work with a certified financial planner or registered investment advisor to give you confidence in your strategy, help you avoid any costly penalties and ensure you don’t leave any money on the table.

If selling is still part of your retirement plan, the help of a professional is essential, says Norm Sherman, a certified mentor with SCORE, a national volunteer organization that offers free business mentorship. First, you need to know whether your business is sellable and what you can realistically expect to net in a sale.

An investment banker or business broker can evaluate your revenue, profit margins, business structure and market to give you an honest assessmen.

“Don’t operate blindly; find experts who can help you,” Sherman says.

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