Why and how to prioritize retirement contributions as an entrepreneur

January 16, 2024 | 3 minute read

Optimism is a powerful asset for any small business owner, but when it comes to planning for retirement, being overly optimistic can have a downside. Many entrepreneurs place a great amount of faith in their ability to sell their business at an attractive valuation and live off the proceeds. As a result, they don’t save adequately for retirement.

 

The fact is, many businesses simply never get sold. Or the timing might not be right. You may want to retire at a point when your business’s valuation isn’t at its peak. “You may think, ‘I love doing this and don’t ever plan to retire,’ but many people don’t retire at the times or for the reasons they expected,” says Judith Anderson, senior vice president, Retirement & Personal Wealth Solutions at Bank of America. As a result, it’s essential to prioritize retirement savings, even when saving seems at odds with the need to make ongoing investments in your business.

 

Retirement savings strategies for entrepreneurs

Set goals

Estimating your projected financial needs in retirement will help you calculate the amount you need to put away to secure the retirement you envision. From there, you can devise strategies to save and invest to reach that goal.

 

Speaking with your financial advisor is a great way to get started. Before you meet, estimate your future financial needs with a retirement calculator or worksheet so you can discuss and address any potential gaps in your savings strategy.

 

Start small (with planned increases)

It may be difficult to save, given the need to cover payroll, invest in your business and make quarterly tax payments. But it’s better to start small than not to start at all. The biggest investment advantage is a long-term horizon. Anything you can contribute to your retirement accounts today can potentially help make you better off tomorrow.

 

Plan to increase retirement contributions as your income grows. “You can build up the account [over time] — instead of waiting 30 to 40 years and getting to the cliff and finding there’s no safety net there,” Anderson says.

 

Build your nest egg consistently

You’ll be surprised by the progress you can make with regular retirement plan contributions. Some entrepreneurs like to devote a certain percentage of every paycheck or gig they take to keep up with their retirement contributions. Others, particularly owners of seasonal businesses with variable revenue, plan to set aside a specific dollar amount every month, quarter or year when funds are available.

 

However, don’t give up entirely if it’s not possible to contribute at set intervals. For instance, if your business is seasonal, you potentially may be more successful making contributions for the year in one swoop when you are flush.

 

Automate your contributions

Opting to make regularly scheduled contributions using your bank’s automated transfer system to move your funds into certain retirement accounts, such as an IRA, can help you get accustomed to saving money for retirement. The automated approach helps establish a “baseline contribution that you can save consistently,” says Anderson.

 

Make the most of tax benefits

Many entrepreneurs don’t prioritize retirement contributions because they’re afraid they won’t be able to save and keep up with quarterly tax payments simultaneously. However, contributions to tax-advantaged retirement accounts such as individual 401(k)s and IRAs potentially may reduce your annual tax bill, freeing up more cash to contribute.

 

Meet with your accountant or tax advisor at least annually to make sure you understand the tax implications of the decisions you make when saving for retirement. You may need to adjust your approach if your situation has changed or if tax laws are revised.

 

As you build your retirement savings, your progress will inspire you to save even more. There’s nothing like momentum to keep you motivated.

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