Many business owners may never be able to retire. Like most Americans, small business owners are sometimes underprepared, and haven’t given enough thought to their retirement savings strategy.
Your Business IS Your Retirement? Maybe, Maybe Not.
Many business owners plan to sell their businesses and use that income to retire. Quite a few obstacles could hinder your financial future if this is your intention.
- Is your industry volatile or highly dependent on current economic conditions? Circumstances such as interest rates, political policies, resident migration, weather, and supply chain instability are outside your control, but may have a substantial influence on your business.
- If your business is built on word of mouth marketing, personal relationships, and reputation, then removal of the business owner could mean the death of the business.
- The “Great Resignation” has caused worker shortages for all types of companies, making it hard to keep good employees on board, and even harder to find new ones to replace them. Without a reliable staff, the business valuation will be low.
- Many owners view themselves as the person-who-does-the-work instead of the person-who-runs-the-business. If you’re a better worker than you are a business owner, it will certainly affect how your business is run, how much money you can make, and how highly the business can be valued.
It’s not uncommon for business owners to work many hours they are not paid for. For example, many established contractors make less than $100k/year and some even admit that when they factor in the true number of hours they spend, they make less than their employees. Many don’t have reliable health care benefits, and only a small fraction understand the true costs associated with running a business.
Have you ever calculated how much you need to retire? Is your business worth enough to cover the amount of retirement savings needed? For many, the answer is no.
If you fall into the category of business owners who believe they either don’t need, or can’t afford, a 401(k) plan, consider the following realities.
Attracting Good Employees Affects Your Retirement
The “Great Resignation” has been brutal. Most employers report that it’s getting more difficult every year to find good employees. Employees are dropping out of the workforce at an alarming rate.
Of those who left a job in 2021, 43% cited insufficient benefits as a reason for their decision to leave.
A good retirement plan makes you a more competitive employer, making it easier to find good employees. And it’s easier to keep them, too, since happy employees are less likely to go searching for another job.
A 401(k) is often workers first experience with saving and investing. This fact alone can engender loyalty to the employer who offers it, and it certainly has the potential to be a life-changing benefit to the employees who need it most, those in the lowest quartile of income earners. Many 401(k) plans come with an auto-enrollment feature. This will encourage workers, especially the youngest and newest ones, to begin preparing for their retirement, making them more financially stable overall.
One of your best recruitment tools is an immediate vesting schedule for employer contributions. It’s a tangible benefit that can make you a more attractive employer than your competitors, giving you a better pool of applicants to choose from, and a happier workforce that is less likely to shop for better offers.
There are some important unseen benefits to a 401(k), too. Companies which offer a retirement plan are viewed as more professional, reliable and mature. This can potentially increase the valuation of the company at the time of sale.
And who is most likely to buy your business? For many, it’s an ambitious employee who makes the purchase, taking control of the company over time. Attracting good employees may be the best route most owners have to a comfortable retirement.
Save on Taxes—Both Personal and Business
One of the biggest reasons business owners choose to offer a 401(k) plan is the tax savings. And, besides the substantial tax advantages businesses can access through a retirement plan, business owners can use a 401(k) to help themselves prepare for an exit from their business.
First consider the benefits every participant can take advantage of. Retirement contributions are typically made pre-tax, essentially reducing the taxable income for those who participate, and allowing funds to grow tax-free until retirement. And, since contribution limits are much higher for 401(k)s than for IRAs, the potential for real retirement readiness is higher too.
Next consider how business tax benefits help your company thrive. Money spent on retirement plans is a deductible expense for businesses. Since employer contributions are made pre-tax, they aren’t subject to payroll taxes, such as Social Security and Medicare. For business owners, this means you can offer your employees a higher benefit instead of a raise, and save on payroll taxes while creating a deductible expense.
Current tax credits are beneficial to businesses too. Current federal credits allow businesses to deduct half of the expenses to start a new retirement plan, at least $500 and up to $5000 per year for three years. Additional credits are available for plans that include an auto-enrollment feature. Proposed legislation currently under consideration may save you even more. The SECURE 2.0 bill, if passed, would expand credits to cover 100% of startup costs, and contribution credits of up to $1000 per employee.
Lastly, let’s consider one of the most powerful tools for business owners to maximize their retirement potential, and that is profit-sharing (or non-elective) plans. These plans allow employers to give excess revenue to employees rather than to the government, thereby reducing taxable income while avoiding payroll taxes. Businesses with high tax bills are often advised by accountants to offer profit-sharing plans as a solution.
And, importantly for business owners, the “new comparability” method of calculating profit-sharing amounts (one of several available) typically provides more compensation for those who are older and make more money, which can do a lot to help owners to maximize the contributions to their own accounts.
401(k)s Are No Longer Expensive
Retirement benefits used to be prohibitively expensive for small companies, but technology has made them more accessible and affordable than ever before. Automated platforms offer small businesses a way to get started very quickly, at a cost of just a few dollars per month, with almost no ongoing input needed from you.
Your 401(k) could practically run itself.
When It’s Time to Sell, Get Top Dollar
Imagine the perfect scenario that would allow you to sell your business and get enough to retire on.
- You have a good number of reliable employees who are happy with the company, and are not looking to leave.
- You have one or two particularly ambitious employees who are interested in buying the business and keeping it alive for another generation.
- The company is financially stable, has clear business methods, clean records and solid recurring revenue relationships that provide a good valuation.
- You are young enough (and physically well enough) to provide a long transition period to a new owner.
- You have enough personal retirement savings to help with the transition and to supplement the profit from the company sale, so you aren’t putting all your retirement eggs in one basket.
A 401(k) plan won’t solve all your business problems. But you can have more stability, and more freedom to retire on your own terms, when you offer a good affordable 401(k) plan to your team and take full advantage of it yourself.
