Whether you are just starting out on your professional journey or you are an established player in the corporate rat race, it is essential to safeguard your financial future. The proportion of working Americans who are not saving for retirement, is a staggering 40%. With millennials charting out their future by striking out on their own, it’s important to have a strategic retirement plan in place.
Whether you’re in your 20s or 40s, it’s never to late or too early to save for a rainy day and your retirement. While most individuals are struggling to understand how retirement planning works, we reached out to [no.] financial experts and asked them one question: What is their #1 retirement tip for Startup Founders?
The response we received from experts was overwhelming and it was difficult to choose the best out of the lot, but we managed to round up the top retirement tips for businessmen. Here’s what the experts had to say:
Steven G Kitchen
There are three important areas about your business I would like to touch on. The first, which gets the most focus, is the value of your business. This represents the dollar amount that your business is currently worth if you were to consider selling it.
The second type of money we call your Lifestyle money which represents the dollars that you are spending to maintain your current standard of living. Lifestyle money can be broken down into three smaller categories which are:
A: Expenses and benefits you enjoy because you are the business owner.
B: Money you take from the business to save or invest outside your business.
C: Your remaining lifestyle is that amount left over after taxes for consumption.
This brings us to the third discussion, which is the Expense Lost to operate your business. Expense Lost is not only the money you are forced to spend which is simply the cost of doing business but also money you could be losing unknowingly and unnecessarily. Obviously if you knew where the losses were occurring you would have already solved those issues.
Many advisors have ideas of what is the best way you should save or invest for retirement, with the money your business is generating. When it comes right down to it there is no better place to invest your money than in your “own company” simply because it is something you know and you can control to some degree. The money your company generates is investment return. We believe there is more opportunity to positively impact your business financially by helping you avoid expense losses, along with helping you pick better investment opportunities.
Invest In Your Own Company
“When it comes right down to it, there is no better place to invest your money than in your “own company” simply because it is something you know and you can control to some degree.”
My number 1 retirement tip has to be to move abroad for your retirement to some place where your money will go further. But not just any inexpensive country. In the years leading up to retirement, I think a good idea would be to head out on a vacation (or two) every year to different places that you think you may be able to live out your golden years. Talk to realtors, rental agencies and other retired expats who have done the same.
Find out what your expenses would be and compare them to retiring at home. If you can cut your expenses in half or in a third, you’re doing great!
Andrew Schrage (Money Crashers)
Your best bet is to come up with an amount you can afford to invest in retirement, based on an average month’s worth of income. However, you should then make sure that you set aside extra when you experience a month where revenues are higher than normal. That way, when the slower months come around, you’ll still be able to stay on track and to reach your ultimate goal – a happy and financially comfortable retirement.
I would start with a minimal amount that is somewhat less or equal to a percentage of your annual receipts – set up to automatically come out of an account. Then quarterly, look back at your financials and adjust upwards based on any above average profits.
Graham Ross Russell
“Don’t retire – there is always a new challenge awaiting your skills and enthusiasm, and keeping active and interested in the world about you will help you to keep happy, healthy and hopefully solvent!”
Don’t assume 401(k)s are only for big companies. Even if you’re a one-man (or woman) show, you can start a solo 401(k) and get the same tax benefits as plans offered by larger firms. You can open an account through a brokerage firm or look to start-ups like Ubiquity for potentially lower-cost options.
My suggestion is to set up a retirement plan. The SEP and individual 401(k) are a great way to save for retirement. Saving in those accounts is a great way to reduce your tax liability. If your income isn’t stable, then save as much as you can on the good months. You can’t depend on your business to fund your retirement and you need to save while you can.
The best financial and investing tip that I can offer an entrepreneur considering retirement is simple; look forward! I make reference to considering retirement because we entrepreneurs never truly retire.
Twenty one years ago I retired but,it never took! For example, I am doing another startup and have other ventures under consideration. Such behavior is typical of true entrepreneurs.
As for looking forward, entrepreneurs considering retirement must not only understand but must take action based on understanding that the future will be different. The past is gone and soon today will be part of that past. We must always look forward to the future and anticipate the changes that will bring.
The only constant we can depend on in the future will be change. In investing and in financial management there is no such thing as set it and forget it. That means any intelligent and responsible retiree needs to become financially aware, educated and act on that knowledge.
That thinking opens a vast array of topics to that need to be covered so any pending retiree has a manageable to do list that must be covered as parts of preparing for a financially comfortable and secure retirement.
“Self insure by saving money and try to take advantage of some of the tax and retirement savings advantages afforded to business owners – for example if you have a small business you might explore a solo 401K which allows you to set aside more qualified savings each year and in an emergency you can borrow against it.”
Jonathan Look, Jr.
One of the most important things I learned after I retired was to break the habit of spending money on “stuff” I didn’t use, didn’t need or didn’t add value to my life. Often when people are busy working they make purchases solely for the momentary thrill of treating themselves to the new possession. They reward themselves this way because that is really all they have time to do. It is a hard habit to break, but when you retire you have the control to quit playing that game. Science shows us that if you have time, spending money on new experiences makes a person happier than just accumulating more possessions. So, reward yourself with new experiences!
Barbara Friedberg, MBA, MS
I’ve been an entrepreneur for many years. My parents were both entrepreneurs as well. So there was no question about who was responsible for our future. We all have taken financial responsibility for our own financial futures.
An entrepreneur needs a mental (and possibly written) checklist of priorities. Retirement saving should be at the top. Don’t splurge when a big check or contract comes in, because that payday might not be repeated the following month. Set up your own retirement savings plan; a Roth IRA, SEP IRA or any other type of plan. Fund that account with the same regularity that you pay your mortgage and other fixed expenses. Live below your means and prioritize retirement saving, and don’t be tempted to blow it when a big check comes in. That way you’ll have enough money set aside for the lean months and you’ll be on track for a rich retirement.
If you’re a business owner who don’t have a consistent income stream, the key is to build a sizeable liquid stash of cash you can access when and how you want or need it, to smooth out cash flow, and/or to get the money you need to grow your business and stay ahead of your competition. As Mark Twain noted, “A banker is a fellow who lends you his umbrella when the sun is shining, but wants it back the minute it begins to rain.”And financing for small business owners has still not gotten back to where it was before the Great Recession.
But did you know that your liquid cash account can double as your retirement savings account, and let you sidestep banks and Wall Street to grow your wealth safely and predictably every year, even when the markets are tumbling? This 160-year-old strategy also allows your money to continue growing, even when you’re using it for business expenses or anything else. Unfortunately, you won’t hear about this strategy called “Bank On Yourself” from the mainstream financial gurus.
HapDiv – Jonathan
As entrepreneurs with variable incomes, the single best thing I can suggest is that you save at every opportunity,
As entrepreneurs we think about the growth of our businesses. We consider how we can improve the quality and value of the products and services we offer as well as the experiences our customers and clients have with our business. We put in place specific plans and we follow them. We check in on our progress relative to our plan goals on a regular basis to determine if we need to change anything right now. We tweak the plans and our actions to attract more customers and create more success.
Successful personal finance is really not very different from successful business. We have plans, we fulfill those plans, we check progress towards our planning goals. In personal finance, however, we probably shouldn’t look at the metrics of our success on a weekly basis like some businesses might… it takes time to create wealth from savings and investing.
The critical decision (and I believe the true mark of the successful business) is what they do with excess cashflow. If you continue to, year after year, re-invest that money back in the business and you are not saving and investing outside your business, you are NOT yet successful. In order to create the lifestyle you want you have to seriously consider and strive to save and invest money outside your business (as well as re-investing in your business). To attain that moment where you don’t NEED to come in anymore, but the income keeps flowing, you MUST have an asset base that spins off your future income stream.
For some rare few, this will mean a business succession plan of sorts (inventory liquidation, business sale or merger) that will create the asset that will spin off the income they cannot outlive. For most of us, however, it will mean the regular saving and investing of a large portion of our incomes NOT in our business. Whether that income is small and variable or large and consistent, we need set it aside in an emergency fund at the start, then max our 401k and other retirement programs, and then save and invest in taxable accounts on top of that.
If you are not saving & investing outside of your business, you are not getting ahead.
Michael E. Kitces
Entrepreneurs should be certain to keep an especially large cash reserve for their personal expenses, as often it’s the need to cover personal overhead that can sink the sustainability of a business. More generally, recognize that as an entrepreneur, your company already is a highly volatile stock, which means the rest of your investments and portfolio should be highly conservative to balance out that risk!”
Retirement and self-employment can be a difficult thing to swallow for some. Many entrepreneurs are just scraping by, but if and when you have a great month, you always should fund your retirement accounts. Open a SEP IRA and a Roth IRA to help you achieve this goal. There will some months you might not be able to contribute much, but even if it’s $10, just put some money into your retirement accounts. Take advantage of the good months to bolster the bad months.
My biggest retirement tip for entrepreneurs would be:
Be sure that you have a retirement plan in place for yourself. Depending upon your business situation and income options like a SEP-IRA, a Solo 410(k), a regular 401(k) or even a pension plan might be appropriate. You need to plan and save for your own retirement, don’t just assume that the business will grow to a point where you can sell it and fund your retirement that way.
Financial Advisor & Freelance writer based in Arlington Heights,IL
Our adventures around the world allow us to interact with many younger travelers in cafes and restaurants. Travelers are a great source of information about where they have been, places to stay and where to avoid. Things to do and the best way to get to a destination are often the topics of conversation.
Many times we are asked about how we can afford to travel for so long and then there’s the predictable wistful response: “I wish I could do what you’re doing.”
That’s when I tell them they can.
I explain in simple terms about investing and how they can create their own pension or annuity or as I like to call it a “personal money machine.” It is right about now when their eyes glaze over like they are speaking with their crazy uncle at a Thanksgiving Dinner.
I bring their attention back by saying they have something that I do not have time. Usually I get a nod and a blank stare. I go on and ask if they know what “compounding” is. More often than not, they do not have a clue. These are college grads or they are taking a break from school to pursue their traveling bug. But to my surprise they do not understand the concept of compounding, which, in my opinion, is the easiest way to build wealth.
According to Investopedia, the definition of compounding is “the ability of an asset to generate earnings, which are then reinvested in order to generate their own earnings. In other words, compounding refers to generating earnings from previous earnings.”
The earlier these “kids” get started investing, the more financially independent and self-sufficient they will be and sooner rather than later. Time is on their side. It takes very little to open an online brokerage account buying shares in VTI, (Vanguard total stock market Index) or SPY (Standard and Poor 500 Index). Fees to purchase shares have never been lower nor has it been more convenient.
From the year I was born, the “average” return for the S&P 500 Index has been 12.24% to the end of 2015. One Dollar invested grew to over $692.00, which is a fantastic return for letting money work for you, the investor. Imagine if I would have had just $1,000 invested the year I was born. It would be worth $692,000.00 today without adding another cent. Amazing! Your mileage may vary and you can check here, but the important thing is for this younger generation to get started now and take advantage of the power of compounding.
We created our own money machine before we retired early in 1991 and we were 38 at the time, older than these young travelers with whom I am speaking. Yet we knew we still had many years for our investments to grow thereby allowing the market to work for us while we traveled the globe.
The compounding effect on their early-in-life investments will pay them dividends far into the future and can become their solid foundation for retirement. If there was one thing I could convince them of, it would be to start investing now, take control of their financial future and build their own money machine.
I recommend that you try to put 10%-20% of your income (as you get paid for jobs) aside for retirement (401K, IRA, etc.). If you put the money aside ahead of time, you won’t miss it!
Don’t wait to begin planning for your retirement. You only get one chance to do it right so get started while you still have time to fine tune your journey. And remember it is not just about money. You also want a good understanding of what you will do to take advantage of your new freedom, stay engaged with life and assure you live a fulfilling and fun retirement.
One of my biggest lessons learned in growing my business is how critical the distinction between business revenue and personal income is. As entrepreneurs, particularly in early stages, it’s really easy for all the financials to get thrown together, but setting aside a consistent amount to serve as a ‘salary’ can be a critical part of personal financial planning – as well as business planning.
It ensures that we not only reinvest in the future of our business, but also prioritize investing in our own individual retirements. It’s when we don’t create the distinction between revenue and income and mix the two that personal priorities and business priorities can become unwillingly sacrificed in service of the other.
Make it automatic. Even if you have to start small, open an IRA and automatically contribute to an index mutual fund or ETF each month. Earmark this money, and it will be a priority for you – and your future self will thank you.
Miranda Marquit, Financial Journalist and Founder of PlantingMoneySeeds.com
In my experience, one of the BEST financial tips I could give ANYONE, especially business owners, is to stay out of personal debt, especially as you close in on retirement. I typically like people to begin focusing on getting rid of their debts as they enter their 50’s. While this may impact the amount that people accumulate in retirement wealth, I have found that it provide MUCH great flexibility in retirement.
Joseph Hogue, CFA
My retirement tip is to diversify your tax liability through both a traditional and Roth IRA. Most people think a Roth IRA, which pays out tax free withdrawals in retirement, is only for those planning on a higher tax bracket later in life. Nobody really knows what taxes will be like in the future. You may be expecting less income and lower taxes now but what if you become super successful and your business begins throwing off lots of cash? Having both a Roth and traditional IRA means tax savings now through the deduction and tax-free withdrawals later, the best of both worlds.
A budget is the single most important item for a pre-retiree (or post-retiree for that matter). You absolutely must know where your dollars are going. If your income fluctuates, use a 12 month income average as the basis. If you income has large swings, it is safer to average the four lowest months and build the budget around that figure. This approach insures you will not bankrupt yourself in the lean times, and be able to invest your spare cash in better months.
Early Retirement Guy
My top tip to anyone looking to stabilise their finances is to track their expenditure month by month and identify the recurring expenses. These expenses may seem small when taken in isolation but when tracked as reoccurring it can be eye-opening to see how much they add up to each month/year.
Mrs. Katy Winter
The easiest way to retire earlier to have extremely low expenses – you do this by identifying what’s important to you in life, and then spending as little money as possible outside of that. For example, if you’re not a food lover, then choose a basic, cheap but nutritious meal you can make in bulk and then eat for dinner most nights. If your living space doesn’t bother you, choose the cheapest safe place you can live in, and work from there.
If your passion is your work, then don’t distract yourself from that by spending money on things you don’t need – think of Steve Jobs sitting on his bare wooden floor with just a light and his computer.
Once you reduce your expenses, you’ll have more money to save and invest, and when you do retire, you’ll need less money and be used to spending on only things which really mean something to you.
Get connected to people that are similar in intellect, that see past themselves while supporting growth and contribution for the greater good.
My advice to entrepreneurs is fairly simple: establish a Solo-k Plan (A.K.A. “Indie-k”), if eligible, and contribute as much business and personal income as possible. These plans operate in very much the same way as 401(k) Plans your constituents might be familiar with; however, they are designed with business owner and spouse in mind. As an added bonus, they are exempt from many of the reporting and disclosure requirements that plague sponsors of the more typical variety.
Savers will be able to defer up to $18,000 into these plans in 2016 with an additional catch-up contribution of up to $6,000 permitted for those 50 or older.
A Reality Check for Business Owners’ Retirement Planning
Here’s a reality check for those business owners whose expectations and misconceptions about saving for retirement prevent them from starting and maintaining a retirement plan through their business.
The State of Business Owners’ Retirement Planning
Let’s start with the big picture. It’s no longer debatable that Americans aren’t saving enough for retirement and that those savings are not going to be adequate. Only approximately 50% of the work force is covered (and not necessarily participating) by an employer-sponsored pension plan which hasn’t change for almost 30 years.
Business owners are less likely to have a retirement plan than people who work for them according to the Small Business Administration. Why not? In many cases, their expectation and misconceptions get in the way.
According to a recent Guardian study, 35% of business owners are expecting to fund their retirement through the sale of their businesses; and only 17% have identified potential buyers. The reality is that they may not be sell their businesses when they want to, or if the price they can get is for the “value” (at least in their minds) of the business.
There’s no formal study on the misconceptions business owners have regarding starting retirement plans, but I’ve got plenty of anecdotal evidence. Here are some of the objections I hear from business owners with an appropriate response:
1. “Retirement plans are too expensive to set-up and administer.” The 401(k) marketplace provides a wide range of choices, business models, and delivery methods. The business owner has a choice to have a plan is both cost-effective and easy to maintain.
2. “I have to make a contribution every year.” Not exactly. A 401(k)/profit sharing by its very nature generally allows the business owner to make contributions determined each year on a discretionary basis.
3. “I have to provide the same contribution to the employees as for me.” Not necessarily. There are allocation methods such as New Comparability which may permit a larger contribution for the owner than for the other employees.
4. “The tax laws will limit my ability to maximize my 401(k) contribution if not enough employees participate.” Again, not necessarily. A 401(k) Safe Harbor Plan may permit the business owner to automatically meet the 401(k) test at a reasonable cost for the other employee.
Financial advisors can play a key role – maybe THE key role – in helping business owners realize the reality of their expectations and their misconceptions. As Guardian has noted, approximately 35% don’t have a financial advisor to help them plan for retirement. In other words, opportunities for advisors.
I’d recommend preparing a budget for their business to understand the expected monthly cash flow. Then set a retirement contribution as an expense of the company that would be over-funded during the good months and perhaps skipped during the poor cash flow periods. If an estimated retirement contribution isn’t defined at the outset of the year, it’s very likely to be overlooked entirely. Also, by funding in the good months throughout the year, an entrepreneur can take advantage of dollar cost averaging their retirement contributions.
A HUGE thank you to everyone who shared their valuable advice for this mammoth post! Please share if you find it useful and interesting
We would love to know your take on the question?
So, What is your #1 Retirement Tip for Startup Founders?