If you're running a small business, then you’re likely familiar with uncharted waters. But while navigating the next financial quarter might be familiar territory, there is still one unanswered question that needs a solution: what you’re going to do about retirement.
Retirement benefits aren’t only a great way to attract top talent to your business, but vital to your own financial peace of mind. As a small business leader, it’s up to you to think about which plan suits your needs. Here’s what you’ll need to know:
1: You Can Set Up Your Own Company Retirement Plan
Most people hear the phrase “401(k)” and assume it’s a perk to the standard employment contract—one of those side-benefits to working the nine-to-five. Maybe you never imagined yourself ever setting up your own 401(k). But there’s no reason you can’t set up a 401(k) for your own small business, no matter how small it might be. Here are a few options worth noting:
- 401(k) Plans run the gamut from one-participant (or “Solo”) plans to company-wide plans. Because they have high contribution limits, these are great for employees who love to put away money for retirement.
- SEP: Simplified Employee Pension plans, including SEP-IRAs, are available for businesses of any size, according to the IRS. Whether you run a small business or a sole proprietorship that contracts out its workers, these are worth exploring.
- ESOPs: Employee Stock Ownership Plans are available to companies that meet certain criteria—so if you’re a startup, there’s a chance you might not qualify. But this can be a tremendous incentive to inspire motivation and teamwork at large companies.
2: Retirement Accounts are Really, Really Nice
Why set up a retirement account at all? Why not store some money under your mattress for a rainy day? Why not put it all into a single stock and hope for the best?
The answer to all of the above: retirement plans make investing really, really nice. Better than mattress-stuffing, better than owning a general investment account. Here’s why:
- Saving money. Elected salary deferrals, writes the IRS, are excluded from an employee’s taxable income. That not only provides incentive to invest in retirement, but it’s better for every employee’s bottom line.
- Tax protections. Let’s say you invest in a Roth IRA. That money then grows tax-free (since you pay contributions out of already-taxed income). That means that you can maximize the miracle of compound interest to build wealth over time—and so can any one of your employees.
- Automated investments. From the perspective of your employees, having their investments automatically taken out of their paycheck is a great way to maintain a budget without ever “missing” the money that they never saw in the first place.
3: Planning is Better than Nothing At All
Even if you don’t think you can put aside enough money for retirement—especially in those early start-up days when you’re simply trying to turn a profit and make a living—then think again. One of the big problems most investors have isn’t that they can’t save enough; it’s that they don’t plan for retirement in the first place.
According to a study in 2015, the majority of small business owners hadn’t prepared for retirement. That means that all you have to do is create a plan for your small business and you’re already ahead of most entrepreneurs in your position.
Does that guarantee a successful retirement? No. But the key is to get started sooner rather than later. Not only will your tax-protected accounts help your initial investment grow through compound interest, but it’s far easier to readjust a retirement plan that’s already started than start from scratch in ten years.
4: It’s Vital to Keep Retirement and Personal Assets Separate
Small business owners may know what it’s like to tap into emergency savings to make rent on their office or to cover payroll. It’s not a pleasant feeling.
But as your business grows, that doesn’t mean that you should keep up your “startup” habits. The key here: don’t view your retirement assets as an emergency funding account. Taking money out of your retirement will hit you with taxes and fees that render it far too expensive.
If you ever think “well, I’ve always got my IRA for an emergency,” it’s time to re-evaluate your thinking. If you take money out of an IRA before retirement age, you face stiff limitations, including:
- Roth IRAs: While you can withdraw your contributions, but you can’t withdraw any profits you’ve earned in the meantime, even for emergencies.
- Traditional IRAs: A penalty of 10% will be assessed, which in turn is a bit like taking out a very expensive loan—with payment due immediately. This is why retirement accounts make poor emergency funds.
There are a few exceptions, as Fool.com notes: withdrawals used toward the purchase of a first home, for example, up to a certain amount. But one thing is clear: retirement accounts are for retirement, and retirement alone—you’ll do much better if you treat them that way.
5: Most Years, It Doesn’t Matter what the Stock Market Does
You might think that now is a bad time to start investing in stocks, funds, and bonds. After all, the stock market is setting new highs—it’s sure to come down eventually, right?
But over time, the returns from the stock market are generally healthy. You can tolerate far more risk if you have a long horizon for investing—for example, if you expect to retire thirty or forty years from now.
Even if you had put a lot of money in the stock market just before the 2008 crash—say, and S&P 500 fund—if you simply left that money there, you would currently be sitting on major profits. The S&P 500 peaked around 1,500 points in 2007-2008…but now stands at some 2,600. As long as you’re prepared for the long haul, you can make retirement planning work. Even if you’re the one who has to create the 401(k).
Making Retirement Happen
The most important thing to remember? Retiring from a small business doesn’t just happen to you. Managing your small business is about dealing with the present, sure—but also about setting up for sustained success in the future. If you haven’t thought about your retirement because you think you’re too young or too busy, remember that these are actually the best times to plan for retirement. A simple look at your available options could be the difference that leads to major results in the future.