Owning and managing a business is a monumental responsibility. As a business owner, you make all of the decisions for your business, which affects your income and the livelihoods of your employees.
Because this is such an intensive, demanding, and (of course) rewarding job, many business owners are too preoccupied to think about their retirement planning. They can spend years focused on building a brand, generating revenue, and outcompeting top competitors, totally ignoring the fact that their retirement accounts are practically empty.
Here’s the good news: No matter where you are in your journey as a business owner, whether you’re just now starting a business or you’ve run one for 30+ years, there are steps you can take to accelerate your retirement savings.
With the right savings strategies, you can accumulate more wealth and fund a lucrative — or at least comfortable — retirement.
How to Approach Retirement Planning
The general course to retirement planning as a business owner moves through the following phases:
Exit strategy and succession planning.
Before you can retire, you need to think about what’s going to happen to your business after you leave. You need an exit strategy and, potentially, succession planning. Are you going to dissolve the business after you leave? Also, are you going to pass it to an heir? Are you going to give your employees the option to buy you out? There are tons of options here, but you need to make a decision and formally document your plans to ensure a smooth transition.
The next phase is arguably the most important, since it’s the fuel that’s going to enable your retirement. You’ll need to increase your savings. As you contribute more to your retirement accounts and see bigger returns in your investments, you should accumulate enough wealth to live comfortably for the rest of your life.
Choosing a retirement account.
You can invest your money however you want, but instead of dumping all your money into a generic brokerage account, it’s typically wise to favor tax advantage retirement accounts. Retirement accounts provide you with specific benefits which vary, depending on the type of retirement accounts you choose. Typically though, they allow you to save more, pay less in taxes, and have more money available in retirement.
Optimizing your holdings.
Putting money into a retirement account is wise, but if you want to take full advantage of the benefits provided by these accounts, you need to optimize your holdings. For instance, diversifying your investments across a mix of stocks, bonds, and other assets can help spread risk and potentially increase your long-term returns.
How to Increase Your Retirement Savings
Depending on the nature of your business, and the current state of that business, you may be in a position to increase your salary, give yourself reasonable bonuses, or otherwise directly compensate yourself. But for the sake of this article, we’re going to focus on savings strategies that almost any business owner can take advantage of.
Reducing your expenses and increasing your revenue are the best ways to help your company thrive, allowing you to capitalize on more profits and increase your retirement contributions.
These are some of the best strategies:
1. Utilize accounting automation software.
Accounting automation software comes in many varieties, including AP automation, AR automation, payroll automation, and platforms that provide all-in-one accounting automation. This is particularly significant for business owners during retirement planning because these tools can help streamline financial operations, reduce costs, and enhance efficiency.
Many tasks in the accounting department are predictable and repetitive; using a tool to handle these responsibilities allows you to save on labor costs, reduce transaction fees, accelerate invoice processing, and reduce errors. By implementing accounting automation, you can free up valuable time and resources that can be redirected toward retirement planning and securing your financial future.
2. Go paperless.
Some studies estimate that up to 3% of a company’s revenue is spent on paper. By going paperless, you cut those costs and possibly free up resources that can be redirected toward retirement planning. On top of that, you’ll be executing a strategy that helps your company become more environmentally-friendly and sustainable, which can benefit your brand.
3. Sell assets and lease/rent.
An option available to some business owners planning for retirement is selling existing assets and, if those assets are necessary, replacing them with leased assets. For example, let’s say you have a $1,000,000 piece of equipment in your factory that you currently own. You might be able to lease that same piece of equipment for a relatively low monthly rate. This way, there’s no functional difference in how you run your business, but you’ll have more available cash that you can use as you see fit.
Yes, this is going to increase your monthly operating expenses, but if you’re aggressively planning for retirement, it may be more favorable to get cash upfront. It’s always important to do your due diligence when considering whether to buy or lease assets for your business.
4. Collect cash up front.
Though it’s a somewhat small step to take, consider collecting cash upfront when closing new sales. Some of your clients may be reluctant to pay the full value of your services before you begin executing those services, but you can still collect a portion of the amount they’ll eventually owe.
This has a few different positive effects for your business. It improves your cash flow and collection rates. It also ensures that your customers are serious and gives you more money to work with sooner.
5. Negotiate for discounts.
If you’ve been running your business for a while, you probably have excellent relationships with your vendors and suppliers. If that’s the case, you may be in a prime position to negotiate for discounts. And if you haven’t shopped around for new vendors and suppliers, now may be an excellent opportunity to do so.
If you can reduce the costs of raw materials or essential services and products, you can significantly improve your profitability. With those extra profits, you can practice more aggressive retirement planning.
6. Optimize banks, credit cards, lines of credit, etc.
Are you confident that your company credit card interest rates are still competitive? If you switch to a different bank, are there incentives that could help you save money or get access to greater benefits? Individually, these moves probably aren’t going to revolutionize your business, but when combined with other savings strategies, they can push your profitability to the max.
7. Bundle your services.
You may be able to score discounts by bundling your services. If you’re working with different vendors for all the services your business needs, see if there are any vendors who can offer multiple services for a discount.
8. Cut unnecessary subscriptions.
Many business owners are surprised to learn how much they’re paying each month for subscriptions. Over time, you might sign up for dozens of different apps and services, not realizing how much those costs are adding up and neglecting the fact that you don’t really benefit from them.
Do a thorough audit of your monthly expenditures and scrutinize whether you need every service. Saving a few hundred extra dollars a month can be a benefit.
9. Manage employee spending.
It’s a good idea to take a close look at your employee spending. How much money are they spending on food, entertainment, and other expenses? Keeping a watchful eye on these areas of spending can help you save a lot of money over time.
10. Push revenue generation strategies.
Finally, push revenue generation strategies that you know, or at least reasonably suspect, are going to work in your favor. If you have marketing and advertising strategies that have consistently worked well for your business, double down on them. As long as you have a positive return on investment (ROI), it’s going to result in a net increase in revenue, resulting in more money you can use for retirement savings.
Retirement Account Options
There are many retirement account options available to you as a business owner when planning, giving you an outlet to make the most of your retirement savings. Here are a few to consider:
Traditional 401(k) and Pension Plans
Mid- to large-sized businesses often have access to traditional 401(k) plans and pension plans. 401(k) plans are funded with pretax income and most pension plans are too.
Roth IRAs are accounts available to anyone — not just business owners. They’re funded with post-tax income, but they allow you to grow your wealth tax-free. The only downsides are stricter contribution limits and penalties for early withdrawals.
The “SIMPLE” in SIMPLE IRA stands for “savings incentive match plan for employees,” and it’s available for small businesses. It allows employees of the business to defer a portion of their pretax earnings into the account, with increased allowances for individuals 50 or over.
SEP IRAs allow more flexibility, since they don’t lock you into a contribution amount as an employer. Pretax contribution allowances are also generally higher.
If your business’s only eligible employees are yourself and your spouse, you can contribute to a solo 401(k), which works much like a traditional 401(k).
Almost any retirement account is going to benefit you as a business owner, so you should focus on maxing those account contributions first. After that, you can continue accumulating savings in individual accounts, which you can use to invest.
Investing and Diversification Strategies
Once you’ve accumulated some retirement savings, you’ll need to invest your money so it can grow and eventually sustain you.
There are always potential risks and rewards associated with investments, so you’ll need to optimize your portfolio. Generally speaking, the younger you are and the more time you have before your retirement, the more aggressive you can be. As you get older, you’ll need to be more conservative. Here are some investment options to consider:
Stocks represent shares of ownership in public corporations. Historically, they’ve been excellent growth assets, but there’s always the risk of losing money when companies underperform.
ETFs and Mutual Funds
For many investors, a superior option is investing in stock exchange traded funds (ETFs) and mutual funds, which allow you to invest in stocks from many different companies, and many different industries, simultaneously. This is a simple way to diversify your portfolio. The big difference between these types of funds is how they’re managed and how much you pay in fees. Mutual funds are actively managed, but they’re also more expensive.
Bonds are, in some ways, a natural contrast to stocks. They have lower growth rates, but they’re also generally safer.
Target Date Funds
Target date funds automatically update their holdings according to your “target date” of retirement. These types of funds usually start with more aggressive, high growth assets, then gradually shift to more conservative, lower growth assets. If you want to take the uncertainty of retirement investing out of the equation, this is one way to do it.
You can also consider investing in real estate or real estate investment trusts (REITs) if you want exposure to the housing market.
Some investors want to diversify further, with investments like precious metals, commodities, cryptocurrency, and alternative investments. Exercise additional caution when investing in atypical assets.
Planning for retirement as a business owner can be challenging and stressful, but it’s a practical necessity if you want to retire comfortably. Once you have an exit strategy in place, you can focus on strategies that allow you to accumulate more savings, and then grow those savings until you reach your long-term goals.
Featured Image Credit: Photo by Yan Krukau; Pexels; Thank you.