You pour your blood, sweat, and tears into every ounce of your business. Unfortunately, while many entrepreneurs are focusing on building their businesses, they forget to properly plan for retirement. When it comes to retirement planning, it’s often asked, “Should you use your business to fund your retirement?”
Some entrepreneurs don’t participate in retirement planning. Their hope is the sale of their small business will fund their retirement. If you’re wondering if you should use your business to fund your retirement, here are a few reasons you may want to reconsider that option.
Reinvesting all profits into the business
Many entrepreneurs hesitate to put their money into retirement accounts for the fear of losing all of it. If they lose all of their hard-earned profit, how will they support their business? If you’re solely relying on your business to fund your retirement, you’re “putting all your eggs in one basket”, which could result in a financial disaster.
Instead of pouring extra cash into savings, many entrepreneurs reinvest every dollar they have back into their businesses. This may seem like the best choice. However, it could set entrepreneurs up for future financial failure. If every penny goes back into the business, the business owner will have nothing to fall back on. This might be the worst case scenario but as the saying goes, “it’s better to be safe than sorry”.
Contributing some of your funds toward retirement or brokerage accounts will aid in your asset diversification. Diversifying your assets will help you better cope with emergencies and boost your savings for the future. If something happens to your business, it’s good to have a plan B to fall back on.
Not developing the right business structure
A sole proprietorship is generally the easiest and most popular form of business organization. It’s one of the least regulated business entities and has plenty of tax benefits. While becoming a sole proprietor has plenty of benefits, it comes with some significant downfalls.
As a sole proprietor you have unlimited liability. This means that all your personal and business assets are at risk. If your debt exceeds your assets, creditors may take ownership of your personal assets to cover your debts.
Many entrepreneurs launch their businesses as sole proprietorships. They remain a sole proprietor throughout the course of their business. If you remain a sole proprietor throughout your business journey, you’re placing your future at risk. If you’re relying on your business to fund your retirement, you’re gambling with your financial security.
Utilizing an LLC (limited liability company) structure can help you minimize risk. Incorporating your business can help you prepare for the future and establish financial security.
Finding the right buyer
Unfortunately, only 1 in 3 small businesses survive longer than 10 years. If you’re lucky enough to survive business ownership beyond 10 years, it’s still possible that you will struggle to find the right buyer.
When you started your business you may have created a fairytale succession plan. You might have imagined someone falling in love with your entrepreneurial model and offering top dollar the moment you were ready to call it quits.
Even though your business might be worth a lot to you, you should be realistic when determining your selling price point. While some business owners may profit enough from their business to finance their retirement for decades, others may not be so lucky.
Not prioritizing retirement planning
When it comes to your business, you may schedule your time down to the minute. Since you have a vision for your business, you can create a very detailed business plan of action. You may assume that, if you pour your heart and soul into your business, you won’t need a plan for the future. In fact, according to a 2017 Mantra survey, 34% of small business owners don’t have a retirement savings plan.
Failing to prioritize your retirement savings plan can have a significant impact on your future prosperity. Even if your cash flow continues to increase, it needs a direction. You need a retirement plan that can help you track your progress toward your goals.
Taking the time to establish a retirement plan provides a variety of benefits. These perks include tax breaks and the ability to capitalize on compound interest. Creating a well-designed business plan can give you and your employees wealth building opportunities, not only for their retirement, but for now as well.
Not wanting to spend the money on professional guidance
Building a business is a complex matter that requires a lot of guidance. There’s a lot of questions that come up throughout your business journey. While it’s tempting to focus on the big picture and forget the details, you need a team of professionals who can help you sort out the complexities of your business matters that have fallen through the cracks.
If you haven’t partnered with a financial professional and want to sell your business to fund your retirement, you could be in for a startling wake-up call. As an entrepreneur, it’s wise to partner with a financial planner who can help you. Whether you want to establish a company-sponsored retirement plan, or you want to figure out the best way to invest your assets, a financial planner can provide valuable guidance.
In addition to enlisting the help of a financial professional, it’s wise to identify a tax professional that can help you make your money go further. Many tax professionals think in a straight line and don’t offer advice to maximize the money you already have. Failing to hire a tax strategist may end up with you giving more of your money to Uncle Sam.
Who wants to give their hard-earned profits away? No one.
That’s why you need the direction and support of a tax professional that can make your money go further. As a business owner, you have many tax benefits that you may not even know exist. A tax professional can highlight these areas and help you minimize your tax bill.
The bottom line
While your business may continue to support your family and dreams, it shouldn’t be your only retirement plan. Pouring your profit into one asset will limit your ability to grow and prosper in the future.
Developing a retirement savings plan is one of the best solutions for wealth management. Partnering with a financial planner will help you discover the best strategies for saving for retirement as an entrepreneur and achieving future financial security.
If you want to get a head start, click here to discover different strategies entrepreneurs can use to save for retirement.