How to Invest for Your Retirement as a Business Owner

by / ⠀Entrepreneurship / January 25, 2021
There's no right or wrong approach to business exit strategies or even to your retirement planning. Everyone will have different goals.

Many entrepreneurs start their businesses because they genuinely like what they’re doing. But even if that’s the case, eventually, you’ll need to think about retirement planning. You can’t keep working forever; at some point, you’ll want to take things easy (and hopefully have enough money to live comfortably). With Social Security running out of money, and no higher-up employer to provide you with retirement benefits directly, it’s all on you to plan for your own retirement.

But how can you do that?

The Basics of Retirement Planning

Let’s start with some basic concepts for saving and building wealth for retirement. One of the most reliable approaches is to gradually build your wealth to an amount that can support you indefinitely for the future. The general rule of thumb is that, if you invest your money properly, you should be able to withdraw 4% of the principal per year and hypothetically never run out. For example, if you’re able to save $1,000,000, this would allow you to withdraw $40,000 a year. If you save $10,000,000, that would afford you $400,000 a year.

First, determine which Retirement Investments are right for you. You’ll want to make sure that the returns you realize during your lifetime are big enough to cover your expenses and still leave you with a comfortable lifestyle.

Balancing Risk Against Reward

Many people like to invest in the stock market and real estate for their retirement. Stocks are some of the most common investment choices; these represent fractional shares of ownership in various publicly traded companies, and they tend to grow as those companies achieve greater success. Well-established company stocks also pay dividends, which are regular distributions of profit granted to shareholders, typically on a quarterly basis. You could also be more aggressive with a higher-risk, higher-reward strategy, like trading futures. With a good futures broker, you may be able to take advantage of financial leverage and possibly make profits far quicker than you could with long-term stock investing.

The problem with this approach is that these investments come with high risks. For example, if you invest your retirement money in the stock market and you make the wrong selections, you’re not going to get very much back. Even if you do manage to receive some money, many people would find the losses to be too much. However, if you’re wise and invest in real estate for your retirement, you could potentially earn thousands of dollars per year.

There are other investment options you may consider as well. These include certificates of deposit (CDs), mutual funds, bonds, and managed discretionary accounts (MDAs). All of these investment options offer advantages and disadvantages. As you look at how to invest in your retirement, you’ll want to take time to determine which option is best for you.

Three key concepts will help you ensure an adequate return for your retirement:

1. Compound Interest

The power of compound interest is one of your best assets. Over time, you’ll earn interest on your investments — then earn interest on the interest, resulting in exponential growth. The sooner you start investing, the more exponential growth you’ll see over the years.

2. Diversified Assets

Investing in just one type of asset will leave you vulnerable to the weaknesses of that asset. Instead, it’s better to diversify your approach, investing in both high-risk, high-reward assets and lower-risk, lower-reward assets, as well as assets from different industries. As you get closer to your retirement date, you’ll need to gradually shift to more conservative investments.

3. Tax-Advantaged Investment Vehicles

Several programs allow you to invest your money in an “investment vehicle” with special rules and benefits that make it easier to save or grow your wealth. As a business owner, you’ll have a choice between many of these programs.

When you begin looking at investments for your retirement, the first thing you need to do is to determine your goals for retirement. Once you know what you hope to accomplish, you can start to decide how to invest for your retirement. If you have a good understanding of what you wish to accomplish and how much you want to make, you can easily put together an investment portfolio for your retirement. On the other hand, if you don’t have such a solid understanding of what you wish to accomplish or how much you wish to make, the decision is much more difficult.

Once you know how to invest in your retirement, it is time to learn how to manage that investment portfolio. A financial adviser will be able to help you with this task. Be sure to let your financial adviser know exactly how much money you plan to invest. They can then help you with investment products that will maximize your return.

Investment Vehicles for Business Owners

As a small business owner, there are several retirement plans you could consider:

Simplified Employee Pension Plan (SEP-IRA)

With a SEP-IRA, you’ll face no setup or maintenance fees, and only the employer will make contributions. You can add up to 25% of eligible employee compensation per year, up to an annual maximum of $56,000 (currently). SEP-IRAs are tax-deferred, so your contributions are pre-taxed, but you’ll pay taxes when you withdraw the money. If you withdraw prematurely, you may face an additional penalty tax.

Savings Incentive Match Plan for Employees (SIMPLE IRA)

A SIMPLE IRA is somewhat similar, but there are fees associated with setting up and maintaining this account. Employees opt to contribute to this account, and employers may match those contributions.

Self-Employed 401(k) Plan

In a traditional 401(k) plan, employees contribute pre-tax dollars to an account, and an employer may match those contributions. These are typically automatically withdrawn from paychecks. However, traditional 401(k) plans can be expensive, complex, and time-consuming to set up, so small business owners can use a self-employed 401(k) plan.

Roth IRA

A Roth IRA is a separate retirement account you’ll create outside the context of your business. You’ll contribute dollars after taxes, but you’ll get to enjoy completely tax-free growth (so long as you don’t withdraw from the account prematurely). The annual contribution limit here is currently $6,000 for most contributors.

Finding an Exit Strategy

Keep in mind that you’ll also want to plan an exit strategy for your business. Are you hoping to sell the business as a last-minute cash-out to fund your retirement? Are you hoping to maintain your ownership and continue reaping some profits while someone else steps into a leadership role? Do you want to pass the business on to a family member?

There’s no right or wrong approach to business exit strategies, or even to your retirement planning — every individual will have different goals. What’s important is that you’re thinking ahead and planning for the future.

Final Word

Knowing how to invest for your retirement is very important. You want to make sure that all of your investments are doing well. It can be easy to get wrapped up in one particular investment and lose track of everything else. However, if you don’t do your homework, you could find yourself thousands of dollars into a bad investment. Taking into account the tips above, you can now be more confident to enter into retirement as a business owner.

Related Post: 30 Ideas for Gifts for New Business Owners

About The Author

Kimberly Zhang

Editor in Chief of Under30CEO. I have a passion for helping educate the next generation of leaders.