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How to Save for Your Retirement as an Entrepreneur

 

Entrepreneurs are exceptional for their personal traits, but in one regard they are just like other driven people – they tend to neglect saving for retirement.

Are you surprised to read that?

As a certified public accountant with three decades of experience, I advise clients on pragmatic retirement strategies because it is self-destructive to NOT save money for your retirement. Yet, I have found that people who are highly creative and focus on building value for their business in the here-and-now, often fall down on this score.

To save you from such folly, here is my guide to “plugging the cord” for profitably operating your small business “into the outlet” of saving for your retirement.

1. Make a decision as the first step. Commit to setting up a retirement plan and making annual contributions starting ASAP. To do this right, contributions must be considered one of the costs of doing business, like any other necessary cost such as rent, insurance, advertising, professional fees and so on.

2. Start small if you have to. You may not be able to afford large contributions at the outset as your business is developing, but get in the habit and you can increase your contributions as business takes off.

To cite the case of a real solopreneur, a psychologist in private practice, she began with $200 in IRA contributions in her first year, and then $400, $800 and $2,000 in subsequent years. Eventually, she was able to contribute the maximum to her IRA account, as allowed by law.

3. Determine how much you will need to save. How much will you need? Often quoted figures are 65% to 80% of your preretirement income. I say you may need more income than your preretirement income. You will have more time to fill, may travel more, dine out more and spend more time on recreation – and you may want a vacation or second home in a warm climate. Keep your goal in mind and track your progress as the years go by.

4. Decide who contributes and how much. Does your spouse work in your business? If so, contributions can be contributed for both of you.

5. Pick a plan. Chose the type of plan that fits your situation and your needs. Consult with a professional on this!

Some types of plans you might consider include:

  • Simple IRA – contribution limit of $11,500 if under age 50.
  • Solo 401k – contributions are limited to $50,000.
  • SEP IRA – contributions up to $50,000, based on 20% of your business’ net income.
  • Solo Defined Benefit plan – contributions can be higher and are based on your age.

You are never too young to start putting in retirement contributions 

There are excuses galore, but none that really cut the mustard. For example, Andrew Shrage is a founder of an online website, but even in his twenties, he made a commitment to start putting away funds for retirement.

“As soon as I graduated college and found work, I made a personal commitment to myself to save as much as possible for my retirement. I opened up a Roth IRA during my first year after college graduation, and I have contributed the maximum amount allowed each year. The power of compound interest is truly amazing, and saving early can make a world of a difference when it comes time to consider retirement. Next year, I plan to open an SEP IRA as well.”

Now, for entrepreneurs who do not yet recognize that I am talking to you, no matter what stage of the lifecycle your business is in, you are never too crunched to set aside something for retirement.

There is a “magic period” for any startup, which consists of the time between bootstrapping and barely paying bills, and the time where you have so much business that you need to hire significant staff. This usually occurs within two years of starting a business and when that business reaches the five-year marker.

In this case, the company is typically made up of risk-taking founding contributors who wear many hats and are able to cover operations, R&D and administration without major staff increases. Profits tend to be high, and instead of spending on frivolous items, the startup founders should be contributing the maximum allowable funds to deferred accounts.

A more moderate program of retirement contributions should naturally occur once hiring efforts have increased the number of employees.

You will have questions about how much you should be saving for retirement, or even which kind of plan is best suited, so consult a professional accountant for advice that is exactly tailored to your own hopes and dreams for the senior years, and what it would take to save for that kind of lifestyle.

Do you currently have a strategy for saving for retirement? We would love to hear what works for you in the comments below. 

Article written by
Paul Herman founded the CPA firm Herman & Company with the belief that growing businesses and successful individuals deserve a level of attention that the large accounting firms simply cannot provide. To this end, he and his team are laser-focused on the issues most pressing to entrepreneurs or folks looking for a "brain trust" for tax planning. Throw in some good golf swings, and you've got a sought-after advisor who can tailor best-in-class solutions to your tax and retirement needs.
2 comments
sharonoday
sharonoday

Paul, my greatest ally in the past decade of entrepreneurial ventures and adventures has been a bright, aggressive CPA who has been willing to listen to where I was in my businesses' different growth cycles.  Together we have maximized every opportunity while staying within appropriate guidelines.  From taxation to retirement issues, I only wish I had found this invaluable resource earlier ...

dianedpickar
dianedpickar

I loved this article, Paul, because I have been putting off speaking with my accountant, and now I know why. Sometimes I am mystified by the options, but you laid it out the 4 retirement plans nice and clearly. I am emboldened to start the conversation, and to continue saving. (Actually, I am a bit miserly myself, but I don't really understand if it is the right amount for the lifestyle to which I'd like to aspire in retirement, or not.)

 
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