Planning for retirement as a business owner

Your small business is your life's work and your love's labor. But sooner than you think will come the day when it's time to rest on your laurels and retire. The key to retiring is to start early and stay strong. Grandkids and shuffleboard may be a long way off, but the time to start planning is now.

Exploring your options for something as important as your later years can feel overwhelming, especially when you're doing it all on your own.

Don't worry. Pull up a chair and get comfy. We've got your back.

Calculating your retirement

According to the Department of Labor, you'll likely need around 70% to 90% of your preretirement income to sustain your current standard of living into your golden years. Using these percentages, and based on when you plan to retire, you can calculate how much you need to regularly invest in your retirement account now to be comfortable later. For most folks, that's around 15% of their current income.

But we don't know your plans for retirement — only you do. Will you move to a lower-income city? Downsize your home once the kids have flown the nest? Or do you envision your retirement filled with bucket list extravaganzas, the sweet life for you and your loved ones? You'll find your number between that 70% and 90% based on what you want for your future.

A financial professional can always help you hammer out the numbers and set you up with a sustainable plan. When in doubt, you may want to stay on the safe side. Your future self will thank your current self for the extra security.

Weighing your options

When it comes to planning for the future, there's no shortage of small business owner retirement options. It's important to know the pros and cons of each plan so that you can decide which is right for you. Here are three of the most popular retirement plans for small businesses:

• Solo 401(k) — also known as the self-employed 401(k), individual 401(k), or one-participant 401(k). The Solo is made for small businesses with just one employee: you (and your spouse, if they also earn income from your small business). There are no age restrictions; all you need is your employee identification number, and you can contribute to your plan both as an employer and an employee. Those contributions are generally tax-deductible as a business expense, as an added perk. However, you contribute to this plan alone, and there are restrictions on withdrawing money, just as with a traditional 401(k). Except under specific circumstances, withdrawing before age 59½ results in a direct tax penalty in addition to regular income taxes.
• SEP-IRA — the Simplified Employee Pension IRA. This plan is easy, flexible and applicable to most business owners, from the self-employed to large corporations. With more generous investment choices and contribution limits, this plan is well suited for those who want to extend benefits to their employees as well as themselves. You can access and withdraw your money at any time, but federal taxes apply. Employers and employees must contribute equally, up to $6,000, and employees can't defer their salary to make those contributions.
• SIMPLE IRA — Savings Incentive Match PLan for Employees. This is the Goldilocks of retirement plans. Ideal for small businesses with fewer than 100 employees, this plan encourages regular contributions from you and your employees, as they are all tax-deferred. You contribute a percentage of each employee's contribution to the plan. Employee eligibility for participation is a little tighter than the other two retirement plans, and you can't borrow against your SIMPLE IRA. But this is an affordable, sustainable option for many small business owners.

Setting up other long-term investments

There are other ways of compounding your savings over time to make your money work for you. Most retirement accounts allow you to invest your contributions tax-free. But what if you don't want limitations on when you can access your money or how much you can contribute at one time?

A standard individual brokerage account allows you to buy investments — stocks, bonds and funds — with your contributions, just as you can with a standard retirement plan. But unlike the IRA plans above, there are no limits to how much you can contribute into your account or when you can withdraw your money.

However, capital gains generated from your investments are directly taxed. And, of course, when you play with the stock market, there's always a risk of not seeing a return on your investments. To learn about the rewards and risks that come with these investments, speak with your accountant or financial advisor.

Getting started

The hardest part of any endeavor is the starting line. It's also the most important. Saving and planning now for the road ahead may be daunting, but you've got this. There are plenty of options for business owners who want to set themselves up for success and retire with ease. Speak with a business banker or advisor to discuss which plans can reliably support your retirement goals.

Looking for more information on how to set up a 401(k) for your business? We'll help you get a plan in motion.