As you focus on the many day-to-day aspects of running a business, it can be easy to lose track of planning for your future. But, every business owner needs a retirement plan to help ensure a secure financial future for themselves and their children once their working life ends. Many put every cent back into the business and others plan to pay for retirement by selling their business. Many also overestimate the value of their businesses and the ease in selling them. However, these approaches can leave business leaders without the means to retire as planned because the value of a business may change over time.
Luckily, starting a retirement plan for yourself and your employees doesn’t have to be difficult. These tips will help you choose a plan and start saving now, no matter where you are in the life cycle of your business. The benefits are big, including tax breaks, earning interest or compound returns on your retirement savings, attracting and keeping top-quality employees and enjoying greater peace of mind.
What is a retirement account?
A retirement account is a type of investment vehicle where participants contribute an amount of their choosing up to a defined limit. Depending on the type of account they choose, the funds are then placed in stocks, bonds, mutual funds, real estate or other investments. Some of these investments, like bonds, may earn interest, and others, like stocks, may increase in value and pay dividends (sums paid regularly by a company to its shareholders). The purpose of opening a retirement account is to save money for retirement, earn returns on your savings and enjoy tax advantages.
How to plan for your own retirement
The best time to start planning for retirement is now. The earlier you begin saving, the more your money can grow over time. With some types of accounts, this growth is the result of compound returns. Compound interest, which Albert Einstein called the eighth wonder of the world, is the interest you earn on both your original investment and on the interest you’ve accumulated. In a nutshell, it means earning interest on your interest. For example, if you deposit $500 in a compounding account and save another $100 per month, your savings will grow to $48,394.84 in 20 years, assuming your investment earns an annual interest rate of 6 percent. Compound returns is one reason it’s so important to start saving as early as possible.
Build your plan
Now that you know why to save, here are simple steps to follow as you build your retirement plan.
1. Figure out how much to save
Most experts recommend saving 10 to 12 times your current annual income in total before you retire. Keep in mind that how much you need to save will also depend on how much you’ve saved already, the type of lifestyle you want after you retire, how long you expect to live, your overall health and the age when you want to retire. Whatever your target, experts recommend contributing 12 percent to 15 percent of your gross earnings (what you make before taxes) to your retirement account each year.
You can use this online calculator to help calculate your target number. Once you have a figure, determine how much you’ll need to contribute to your account each month to meet your goal. Setting up automated contributions can keep the process simple.
2. Choose the option that’s best for you and your business
Choosing the best type of retirement account for you and your employees can feel like a daunting task. Start by learning about the types of accounts available and consider speaking to a financial or tax advisor about which option may be best for you.
Depending on the country you live in, there will be various retirement account options for your employees.
3. Track your progress
Because factors can change over time, including your number of employees, business income, health and other factors, it’s important to revisit your retirement savings plan periodically to figure out how successfully you are moving toward your goal. If you find that you’re falling behind, here are a few ways to increase your savings:
- Review your budget.
Are there areas where you can cut back in order to earmark more for retirement? This could include anything from switching phone plans to eating out less.
- Add to your income.
If you find that you’re not able to save more, it may be time to consider ways to make more. This could mean adding a new product or service to your offerings or taking on a side gig, such as driving for a rideshare program.
- Consider reducing expenses.
Are big mortgage or car payments making it too difficult to save? In some cases, downsizing to a smaller house, more affordable business space or less expensive car can be the key to freeing up some extra funds for retirement.
- Evaluate the cost of debt.
What credit or loan debt is impacting your investment goals? While it may feel good and seem best to eliminate debt as quickly as possible, it can be critical to compare ongoing cost from debt interest to what is known as opportunity cost from debt payments that could otherwise be invested. Comparing future debt payments to historical investment returns can help you decide how to best utilize your available funds.
- Start an emergency fund.
While experts suggest having three to six months of living expenses set aside, that can be a lofty goal to start with. However, ensuring that you have a small cushion of liquid funds available for unexpected expenses such as an insurance deductible or co-pay can help avoid using a credit or loans that increase the overall costs due to interest rates.
4. Create a succession plan
As the owner of your business, it’s important to have a plan for exiting the business if the need arises, whether it’s because you’ve reached retirement age or are facing a life circumstance you didn’t anticipate. Creating this plan involves careful thought and strategy. See Selling and Succession Planning for details on how to get started.
Although you may be overwhelmed by the day-to-day tasks of running your own business, taking the time to plan for your own retirement is an important step toward protecting your financial future — and that of your family. It can also be an excellent way to support your employees. Although offering retirement to your team isn’t required by law, it can be a wonderful investment in your business, allowing you to be competitive when hiring new employees while building loyalty with the ones you have.