Finances in Retirement - Investments

4 Retirement Planning Mistakes Small Business Owners Make

by Alli Thomas

Nov 4, 2022


In addition to the challenges everyone faces when planning for retirement, small business owners and self-employed individuals must navigate more complicated waters when making a retirement plan.  

Many must rely almost entirely on their own money to finance their retirement as they may not have access to benefits like employer contributions to 401(k) plans — or they only had them when they were younger and made less money. And in addition to their own savings and investments, they must take their business into account as well. 

Improper planning could mean you don’t get as much money from your business as you could have — or your business assets don’t go to the right person. If you’re a small business owner, here are four retirement planning mistakes you should avoid making:  

1. Not having an exit plan.

Much like many retirees overlook the need for a drawdown strategy, many business owners feel like there’s just never enough time to think about an exit strategy. In fact, nearly half of small business owners who want to sell say they have NO exit plan at all 

If you don’t have an exit plan for your business, you should start working on one regardless of what you think should happen to the business. It important to have an exit plan in place even if your business is as simple as a consultancy that you plan on shutting down or scaling back after you retire. Depending on your situation, it may need to be a part of your estate plan. 

2. Not having enough life insurance.

As a business owner, many people rely on you financially. Not just your family. Think employees, partners, customers, and vendors. That’s why it’s important to have sufficient life insurance coverage. 

At the very least, your coverage should be able to pay off your debts so that your family isn’t forced to sell the business or other assets such as your house. 

If you own your business with a partner, look into getting a buy-sell agreement. This will allow a deceased partner’s heirs or disabled business partner’s agent to sell their share of the business. An added benefit of such an agreement is that it can also serve as an exit mechanism if a partner wants to divest their ownership in the company. 

3. Lack of asset diversification.

Your business may be one of your biggest assets (if not THE biggest), but it shouldn’t be your only one. If you do start to invest outside of your business, make sure you hold assets that have little or no correlation to your industry.  

Many business owners tend to be too heavily invested in sectors or companies related to their own. Your portfolio should consist of many different types of assets, companies, and sectors to help hedge against risk. If you haven’t opened a small business retirement account like a SEP IRA, consider doing so as soon as possible. 

4. Not working with a professional advisor.

Working with a financial advisor can help for a few reasons. A good advisor can help you get both your personal and business finances in good order—including retirement planning. Why? Because 30% of business owners have not even calculated how much they’ll need to save for retirement. 

Of course, before you hire anyone to help you, you should ask them the following questions: 

  • How are you paid? Are you commission-based or fee-based? (Hint: fee-based advisors must be fully transparent on their fees, have a fiduciary duty to always act in your best interest only, and must disclose any conflicts of interest when making recommendations) 
  • What relevant designations do you have? 
  • How can you help me with succession, insurance, tax, and legal planning? 
  • How much experience do you have advising small business owners? 

Our advisors can help you make a smart plan to help protect the financial futures of you, your family, and your business. Click here to schedule a no-cost, no-obligation appointment with us today. 

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Alli Thomas

Alli Thomas has worked in the financial services industry for nearly 20 years, with a focus on retirement-related investing. She began her career as a FINRA-licensed participant-services call-center associate at Vanguard, and then moved to Principal Financial Group, where she worked closely with employers, assisting with retirement plan set-up and design, selecting appropriate plan investment offerings, and maximizing employee participation through targeted education campaigns and enrollment meetings. Alli has also worked as a qualified 401(k) administrator and registered investment advisor for several small investment firms. She now writes about all things investment- and finance-related, leveraging her extensive experience and passion for retirement planning to help investors make well-informed financial decisions.

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