Retirement Investing: Considerations for Entrepreneurs

Running your own business is still very much a part of the American Dream. With remote work and employment market shifts fueled by the global pandemic, an increasing number of people are choosing entrepreneurship. According to the Census Bureau, in July 2020 the number of business start-up applications reached record highs, showing a 98 percent increase compared to one year earlier.

Greater flexibility in shaping your schedule, working towards personal aspirations, realizing a unique vision, or achieving financial freedom are among the varied selling points for budding entrepreneurs. If you’re a younger business owner, retirement may be the last thing on your mind. Yet it's critical to think far ahead to ensure the right strategies are put in place.

Here are six areas for consideration as you embark on starting your own business.

1. Consider your exit plan even before you launch the business – It is never too early to consider an exit strategy. This is something business owners should dig into during the beginning stages of self-employment. The ultimate exit goal will help determine how to approach and structure your new business as well as how you should invest for retirement. Some things to consider during this stage are whether the goal may be to sell the business, pass it on to a child or family member, or simply to close operations.

2. Keep your business books clean and separate from personal accounts – Separating business funds from personal / lifestyle spending is essential. Not only will separating business and personal expenses make things easier from an accounting perspective, but it can also protect owners from inadvertent mismanagement of their business finances and income. One approach is to obtain an EIN (Employer Identification Number) and open a separate business banking account. This account should be used for all business expenses, while personal bank account(s) can be used for lifestyle expenses.

3. Gain a clear understanding of your lifestyle expenses so you can project forward to spending needs in retirement – By keeping business expenses separate from personal expenses, it will become clearer what funds will be required to cover spending needs during retirement. A USA Today article from August 2020 estimated that the average American may spend more than 900,000 dollars from the age of retirement (65 years old) through the end of their life. Successful entrepreneurs who want to retire early and/or maintain their lifestyle during their retirement years may need considerably more.

4. Create savings and investments outside of the business – Business owners should be intentional in their savings and investment strategies, to ensure they are accumulating wealth in areas beyond just their business. Investment advisors like Two Point Capital Management can help entrepreneurs create a strategy for building and diversifying their portfolios, helping them focus on reaching key goals over the long term.

5. Consider specific investment vehicles appropriate for entrepreneurs and new businesses – Once a business grows and adds employees, it will be essential to consider adding a traditional 401(k) offering to support retirement savings for the whole organization. But what about when an entrepreneur is just starting out? There are a variety of options to consider, each with their own advantages and disadvantages so review them carefully to find the right one for you.

  • ~ Individual 401(k): An individual 401(k) is a retirement account designed for self-employed or business owners with no full-time employees. Individual 401(k) plans offer many of the same benefits as a traditional 401(k) with minor differences. Owners can make contributions both as an employee and employer to maximize retirement contributions.
  • ~ Simplified Employee Pension (SEP) IRA: A SEP IRA is a traditional individual retirement account like a traditional IRA. SEP IRAs are for solo practitioners and small business owners. Investments grow tax-deferred until retirement when distributions are taxed as income.
  • ~ Simple IRA: A Savings Incentive Match Plan for Employees Individual Retirement Accounts (aka Simple IRA) is another option. This type of plan is available to small businesses with 100 or fewer employees. Many small businesses utilize Simple IRAs because they are often affordable and easy to establish.

6. Get started as early as possible on savings to leverage the power of compounding – When it comes to compounding, time is an ally. Entrepreneurs should make an early commitment to maxing out the contribution limits in their retirement account(s) each year.

The day-to-day experience of launching and building a business can be both exhilarating and exhausting in equal measures. For entrepreneurs this process can be all-consuming, making it easy to forget to cultivate a long-term view. Getting started early with retirement investing brings many advantages. Following these simple steps and finding a trusted investment manager can help any new business owner better navigate the process.

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