Small Business Owners: 3 Common Retirement Mistakes to Avoid

Small Business Owners: 3 Common Retirement Mistakes to Avoid

Starting, managing, and growing your small business is not easy.  Unfortunately, while doing so, you may have neglected your own financial well-being. Here are the top retirement mistakes we believe small business owners make and how you can avoid them.

Published by Motley Fool Wealth Management Originally posted on Tue, Aug 23, 2022 Last updated on January 10, 2024

read time 5 min read

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If you’re like most small business owners, then your business is probably your baby…and likely takes up most of your time! America appreciates your hard work and dedication because small businesses power the U.S. economy. So, thank you!

As one of over 30 million U.S. small businesses1, we know that starting, managing, and growing your operation is not easy. And while you’ve been helping to create nearly two-thirds of the net new jobs since 1995, you may have neglected your financial well-being.2 No worries—we’re here to help. Here are the top retirement mistakes we believe small business owners make and how you can avoid them.

Mistake 1: Not having a retirement plan

The stats are telling: Over one out of every three small business owners don’t have retirement strategies in place, and three out of four have $100,000 or less saved for retirement.3

We don’t need to tell you that not creating a retirement plan can push back your ability to retire. And solely relying on the sale of your small business for your retirement income, while common, is risky. You probably don’t want to put all your eggs in one basket because, as we’ve recently experienced, external factors like COVID-19, supply chain issues, and other economic factors can significantly impact your small business. So having more diversified savings in place is prudent.

Fortunately, there are retirement-savings vehicles geared toward small business owners—such as the Simplified Employee Pension (SEP) and a solo 401(k) plan (Roth or Regular). For both plans, contributions are tax-deductible and grow tax-deferred until you withdraw the money.

  • Simplified Employee Pension (SEP) Individual Retirement Account (IRA). With a SEP, you can contribute 25% of your net self-employment earnings with a maximum limit of $66,000 for 2023.4 SEPs are funded by employer contributions only. One big advantage of a SEP is that it doesn’t require a lot of paperwork or reporting requirements. SEPs also offer flexible funding options—such as the ability to contribute when you file your tax return.
  • Self-Employed 401(k). Also known as a solo 401(k) or a one-participant 401(k) plan, this retirement plan gives you the best of both worlds: you can make contributions as an employee and as an employer, so you can potentially shelter more money at lower income levels. The maximum limit is the same as the SEP, but if you are 50 or older, you can set aside an additional $76,500 each year.5 One of the downsides of solo 401(k) plans is that the paperwork and reporting requirements are significantly higher than the SEP.

If you opt for the solo Roth 401(k), contributions are taxed, but withdrawals are not. So, depending on your personal situation, you may want to take advantage of tax-free growth forever.

Mistake 2: Not having enough life insurance coverage

Life insurance helps take care of your family and loved ones by providing financial security. Life insurance plays an even bigger role for small business owners. Small business owners have an extra liability from their businesses. Life insurance can help protect your estate from business creditors, especially if you take out business loans using personal assets as collateral.

In addition, small business owners tend to be a key person to the business they own, and without you, that business may be adversely affected. So a key person insurance policy could give the company options to either find a replacement or pay off debts from the business (more on that below).

There are many uses of life insurance beyond the death benefits. For example, when a small business owner passes away, family members may be on the hook for business debts. Life insurance can be used to help pay off those debts and help ensure the business you worked so hard to build will continue. Life insurance is also a tax-effective way to help transfer a family business to the next generation.

Unfortunately, more than one-third of small business owners do not have enough life insurance to protect their business.In other words, a small business' average life insurance gap is over $1 million.6 As an owner, you should analyze your current life insurance coverage and see if there are any coverage gaps. The right amount of insurance can provide peace of mind by adding an extra layer of financial security. Consult with an insurance professional for guidance.

Mistake 3: Not creating an exit strategy

For many business owners, their business is the most valuable asset they own, so an exit strategy is integral to their wealth plan. Unfortunately, roughly three quarters of all small business owners do not have a succession plan.7

Creating an exit strategy can help maximize the value and performance of a business. It also provides a blueprint for success and influences the decisions you make along the way. If you don’t have a plan in place, then it may be easier to make emotional decisions that can lower the value of your business or sacrifice your hard-earned legacy in the process.

No matter how long you plan to work, when you want to retire—and possibly leave a lasting legacy—you’ll need an exit strategy. Motley Fool Wealth Management generally recommends that business owners understand the value of their business through periodic valuations performed by a qualified professional. Doing so can provide access to potentially valuable estate planning techniques and put you in a better position to negotiate a sale of the business. And if you plan on using the proceeds from the sale of your business to fund your retirement, then plan well in advance to allow for finding a buyer, going through due diligence, and ultimately finalizing a deal.

Seek a professional partner for your personal wealth

Running a successful small business is a challenging and time-consuming endeavor that requires many skills.

Just as you may work with an accountant to help understand your business’ finances, file tax returns, and more, working with a Wealth Advisor can help you do the same for your personal wealth.

A Wealth Advisor can help you with investment management, such as choosing the best small business retirement account for your business. In addition, one can help you minimize risk and take advantage of opportunities. We know balancing your professional, and personal priorities is difficult. That's why it makes sense to seek a partner to help you meet your financial goals.

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1Frequently Asked Questions About Small Business, 2021 – SBA, Accessed July 11, 2022

2Frequently Asked Questions About Small Business, 2021 – SBA, Accessed July 11, 2022

3BMO Wealth Survey, Accessed July 11, 2022

4IRS SEP IRA, Accessed Aug. 3, 2023

5IRS 401(k), Accessed Aug. 3, 2023

6Small Insurance Gap Survey, Accessed July 11,  2022

775% of Small Businesses Don’t have Succession Plan, Accessed July 11, 2022

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