The business always comes first, and that’s the first big mistake.
Owning a business might be part of your American dream. For some baby boomers, entrepreneurship is also a part of their retirement. A report from the Kaufman Foundation found that baby boomers are twice as likely to plan on starting a business as millennials, and the percentage of businesses being started by Americans 55 and older is steadily increasing.
The problem is that retirement planning is not a priority for many entrepreneurs, and saving for retirement as a small business owner isn’t as simple as being automatically enrolled in a company 401(k) plan. Here are some of the biggest mistakes entrepreneurs are making when it comes to retirement planning:
1. Not having a plan. It’s takes a lot of time and energy to start and keep a business running. It’s certainly not an eight-hour-a-day venture. “They are too busy to have a plan, whether it’s a business plan or a financial plan,” says Christine Russell, senior manager of retirement and annuities at TD Ameritrade in Jersey City, New Jersey. Some 34 percent of small businesses owners don’t have a retirement savings plan, according to a 2017 survey of 1,960 small business owners by Manta, an online resource for small businesses owners.
But taking the time to set up a retirement account offers a variety of benefits, including tax breaks and the ability to get compound interest working in your favor. “In addition to helping to recruit, retain and motivate employees, a well-designed business retirement plan could offer a significant wealth-building opportunity for the owner and employees, not just for their future retirement, but while they are working towards retirement as well,” says Lanta Evans-Motte, a financial advisor at Raymond James Financial Services in Calverton, Maryland.
2. Putting every cent back into the business. Entrepreneurs are sometimes hesitant to put their money into retirement accounts because they worry they will lose quick access to the funds if they need them for the business. “One of the things I see over and over is a lot of businesses plow every dollar they have back into the business,” says David Hays, president and founder of Comprehensive Financial Consultants in Bloomington, Indiana. “That’s a mistake.” Diversifying your assets can help you to better cope with emergencies and save for the future.
3. Selling the business is the retirement plan. Most entrepreneurs overestimate the value of their business and their ability to sell it when they are ready to retire. “Literally, people think you put a for sale sign out and people will come in and write you a check,” Hays says.
You might not be able to sell your business or get enough money from the sale to finance decades of retirement. “Many business owners fail to obtain periodic outside assessments of the value of their business,” Evans-Motte says. “As a result, they can easily overestimate the value of their business, as well as the ease of selling or converting the value to an income stream when they are ready to retire.”
While your business might be worth a lot to you because of the time you invested in it, you need to think logically about the pricing. “We think it’s worth more than it is. It’s like when we have an estate sale, we think grandma’s heirlooms are worth a lot more than they are pricing,” says Wendy Ann Payne, founding partner at Centurion Wealth Management in McLean, Virginia. “Take the emotion out and plan more conservatively.”
4. Not having the business structured properly. Payne says many entrepreneurs start out as sole proprietors and remain sole proprietors. “Not structuring it into an LLC can put your personal assets at risk, which can put your retirement at risk,” Payne says.
5. Not diversifying. If most of your net worth is invested in the business, you should select low risk investments for money outside the business. “Diversify your investments away from your business,” Payne says. “Make sure you are contributing to your own retirement plan besides investing in business. If something happens and you have to close your doors, you don’t want that to be the lion’s share of your wealth. It’s good to have a Plan B.”
6. They think retirement plans are too complicated. Workers can contribute up to $5,500 per year to a tax-deferred IRA. Business owners also have the opportunity to save up to 25 percent of their compensation or $55,000, whichever is less, in a SEP-IRA in 2018. “Something like a SEP-IRA is very straightforward and simple,” Russell says. “There’s a half-page piece of paper they have to fill out, and once they set it up, it operates like an IRA. It is not complex or time-consuming.”
7. Using retirement savings to start a business. As baby boomers retire from their first careers, some will start a business. “Many take investments out of their retirement accounts as seed money,” Payne says. “That can be risky – taking away from your current nest egg to start a business – especially for those people who are later in life.”
