For many small business owners, saving for their own retirement or covering the plans of their employees, can be tricky. Lacking the ease of a government pension or corporate benefit plan, the weight of financial responsibility rests firmly on the shoulders of every entrepreneur – leaving many unsure which investment options to pursue.
And with many small businesses occupied by the pressing concerns of the present, often, saving for the future can be the last thing on an owner’s mind – a striking 75% of small businesses having less than $100,000 saved for their retirement, according to a survey by BMO Wealth Management.
According to Troy Bender, CEO and President of Asset Retention Insurance Services Inc., however: “you need to save for the necessity stream as well as the discretionary stream. You should get the basics down and really look at covering your lifestyle, so you can look back and smile from the thousands of hours you worked owning a business.”
So, to help you do just that, here’s 5 ways Bender recommends entrepreneurs save for their retirement right now.
1) Follow the “Rule of 100”
With so many options available, it can be hard for small businesses to know how much of their money to invest in a retirement account and whether one of high return would be best for them.
Fortunately, through the “Rule of 100”, the answer is easy: simply subtract your current age from 100 and the remaining number is the percentage of how much to invest with risk. For instance, if you’re 45, 55% of your funds should go to a risky investment, while the remaining 45% would be best allocated conservatively.
2) Look at a Simplified Employee Pension Plan
Designed with small businesses in mind, the IRS’s Simplified Employee Pension plan helps employers save for their employees’ retirement, as well as their own, by growing through tax-deferred. Plus, unlike your regular 401k, there’s never any start-up or operational fees and you don’t have to pay annual taxes on earnings.
3) Use Life Insurance
According to Bender, any entrepreneur with a family should have Life Insurance that is 10 times their annual net income. Additionally, “the life insurance can be set up to provide a Tax-Free income in the future, too, that a small business owner can draw from.”
4) Consider Key Person Insurance
Like Life Insurance, Key Person Insurance ensures that the death of any “key person” in the business is covered, affording financial peace to the business and continuity for its customers and employees – another valuable consideration for small business owners.
5) Set Aside a Monthly Amount
For Bender, the ideal amount to put into your retirement fund each month is 15% of your income – however, that’s not to say that all small businesses can afford to match that number right off the bat. “To begin, you may start with 5 percent and then ramp up 2 to 3 percent each year,” Bender advises.
Another method is attempting to match the same potential savings of a standard 401k employee – putting away up to $18,500 annually for those under 50, and $24,500 for those 50 or over.
For, as Bender says best, “small business owners have to do it on their own, and many aren’t preparing properly. Many feel like they will never make it, but they can. The idea is to simply start.”
