Small Business Owners Must Plan for Retirement

Investing
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By Dmitriy Fomichenko

Learn more about Dmitriy on NerdWallet’s Ask an Advisor

Most people entertain the idea of becoming an entrepreneur or independent contractor to become their own boss. Being in control can be a satisfying aspect of business. For certain things, including retirement planning, however, self-employed small business owners are more likely to delay.

So why is retirement planning often delayed or even ignored by small business owners?

Prioritizing business: Most small business owners dedicate the majority of their wealth and effort to the business. When deciding between growing a business and saving for their own retirement, most often, small business owners choose to dedicate all their resources to the former.

Businesses can be sold or transferred, but retirement is much more difficult to delay or avoid altogether. Therefore, investing in a retirement plan should be a priority. What’s more, with a small business 401(k), also known as Solo 401(k), plan holders are also allowed to take out a loan from the retirement fund. The borrowed amount can be used to cover any urgent financial needs, including funding their businesses. As long as the interest and principal are paid back according to the terms, the loan is tax-free and penalty-free.

Relying on selling the business for retirement: Most small business owners expect to sell their businesses at a high price when they are ready to retire. They expect proceeds from selling the business to cover their living costs during retirement.

Even if the business does sell for a healthy amount as planned, it won’t hurt to have an additional retirement fund. As the saying goes, it is not wise to have all your eggs in one basket, and having a retirement account is usually a good backup plan.

Simply delaying contribution: There is no requirement for independent contractors and small business owners without full-time employees to set up a retirement plan. Therefore, many keep delaying it, thinking that they can start contributing to a small business 401(k) when the business improves.

No matter how much business owners plan, they can never guarantee that sales will improve and costs will decrease. Even when the business is growing, unexpected opportunities might come up and demand more cash. Therefore, delaying retirement saving in hopes of better cash flow in the future might not be a good idea. Also, investment in a small business 401(k) can grow exponentially, and the longer the money stays in the fund, the more it can grow.

Another point to keep in mind is that with a small business 401(k) plan such as Solo 401(k), contributions are entirely at the plan holder’s discretion. If a plan holder finds himself entirely short of cash for a year, he can contribute less or even suspend contribution for that year without any consequence to the existing fund.