For many business owners, their company is both their livelihood and their largest financial asset. While building a successful business creates opportunities for long-term wealth, relying solely on its future sale to fund retirement may introduce uncertainty. Retirement planning for business owners often involves building personal assets outside the business while preparing for an eventual ownership transition. Our Senior Wealth Advisor, Yesenia Realejo, CFP®, shared her insights on how retirement planning can differ for business owners.
Why Do Business Owners Often Delay Retirement Planning?
Being a business owner can easily keep one occupied. From focusing on operations, employees, clients, and ways to maintain growth, retirement can feel like a distant concern. It can be a common mindset for individuals to anticipate selling a business when they are ready to retire, but this approach can leave many unanswered questions and planning gaps. By relying primarily on the proceeds of a future sale, a lot of factors could be left outside of your control. But how can business owners build retirement savings outside their business?
Yesenia highlighted that separating personal wealth from business wealth can be a method to build individual retirement savings. Additionally, she mentioned creating dedicated retirement savings, and building assets that aren’t tied to the success of the company. By having multiple sources of retirement income, you may be able to increase your overall flexibility.
Retirement Plan Options for Business Owners
Business owners may have access to retirement savings options that can allow for higher contribution limits than are available through some workplace retirement plans. Depending on the plan selected and the individual’s circumstances, certain retirement plans may offer tax advantages, retirement savings opportunities, and employee benefits.
Traditional 401(k)
- An employer-sponsored retirement plan that allows employees and business owners to contribute a portion of their income toward retirement.
- Traditional pre-tax contributions may reduce current taxable income, and earnings generally grow tax-deferred until withdrawn.
- Could be an effective way to consistently save for retirement while potentially lowering annual tax bill for business owners.
- Annual testing rules may limit how much owners and highly compensated employees are allowed to contribute if participation among other employees is low.
Safe Harbor 401(k)
- Requires employers to make certain contributions on behalf of employees.
- May allow business owners and other high earners to contribute the maximum amount permitted under IRS rules while also providing a valuable employee benefit.
- Potential tax deductions for employer contributions.
Profit-Sharing Plan
- Allows business owners to make additional employer contributions to employee retirement accounts beyond standard 401(k) contributions.
- Despite the name, employer contributions are not necessarily tied to annual profits and may be made at the employer’s discretion, subject to plan rules and applicable regulations.
- The employer can decide how much to contribute annually, giving the business flexibility.
Cash Balance Plan
- Defined benefit retirement plan often used by high-income business owners, professionals, and small business owners.
- These plans may allow for larger annual contributions than some defined contribution retirement plans, depending on factors such as age, income, and plan design.
- Pension-style plan with an account balance that grows based on contributions and a specified crediting rate.
- More complex and may require ongoing administration and careful planning.
Besides saving for yourself, workplace retirement plans are often expected by employees. Retirement benefits can be used as a tool for recruitment, retention, and employee satisfaction. Business owners can use a plan that balances both their needs and caters to their employees.
Different retirement saving options offer different benefits, but there is no one-size-fits-all option. Each scenario is unique and contains individual variables. Before making a decision, you may want to reach out to your financial advisor for a tailored analysis.
Why Business Owners Should Consider Assets Outside Retirement Accounts
While retirement plans can offer tax benefits, they may come with restrictions on when funds can be accessed. Because of these restrictions, many business owners may additionally invest in after-tax brokerage accounts. Unlike many retirement accounts, taxable brokerage accounts generally do not have annual contribution limits or retirement-account withdrawal restrictions, which may provide greater flexibility and liquidity. Having assets both inside and outside retirement accounts can create a more balanced retirement plan and can give individuals the ability to prepare for retirement while also allowing them to achieve personal goals before then.
Retirement Planning and Business Exit Strategies
With a strong personal foundation, business owners may be able to choose the exit strategy that aligns best with their goals. Whether the owner is selling to a third-party buyer, transitioning ownership to employees, or passing the business to family members, financial planning can help individuals build a retirement plan that isn’t only dependent on an uncertain sale price. A plan can allow more freedom to focus on legacy, employees, and long-term vision.
How Can a Financial Advisor Help Business Owners Prepare for Retirement?
A financial advisor may help business owners evaluate retirement planning strategies, coordinate personal and business financial considerations, and develop a plan aligned with their goals and circumstances. Because many entrepreneurs have a significant portion of their net worth tied to their business, advisors can also help integrate business and personal financial planning to ensure both areas are working together toward a common goal.
If you would like to learn more, we invite you to reach out and contact us. We would be happy to discuss your situation and explore planning strategies that align your business and personal financial goals.
Tobias Financial Advisors is registered as an investment advisor with the SEC. The firm only transacts business in states where it is properly registered or is excluded or exempted from registration requirements. SEC registration does not constitute an endorsement of the firm by the Commission, nor does it indicate that the advisor has attained a particular level of skill or ability. The information presented is believed to be factual and up to date, but we do not guarantee its accuracy and it should not be regarded as a complete analysis of the subjects discussed. It is for information and planning purposes only.
Professional advisors, accountants, and licensed attorneys should be consulted before implementing any of the options presented. All expressions of opinion reflect the judgment of the authors as of the date of publication and are subject to change. This is a representation of a general case scenario, however individual client timeline and experience may vary due to one’s unique circumstances.