3 Big Retirement Mistakes Small Business Owners Make

Two out of five small business owners have this problem — what about you?

Retirement planning is an important step for any small business owner. It can be easy to make costly mistakes, but with the right plan in place, you can ensure a comfortable retirement. Small businesses are the backbone of our economy, accounting for 62% of net new job creation since 1995. Small businesses created 12.7 million net new jobs, while large businesses created 7.9 million in 25 years The last.

While many small business owners focus on building their business, they often neglect their personal finances. Here are three of the biggest retirement mistakes small business owners make and how to avoid them.

1. Not planning for retirement

As a small business owner, one of the first things you did was create a business plan. This plan helps you run, manage and grow your business. Just like your business needs a plan, your retirement needs a plan too! Many entrepreneurs are so focused on growing their businesses that they forget about their financial future.

As such, it’s important to start planning for retirement as soon as possible, even if you’re just starting your business. This will help ensure that you have enough money saved by the time you retire. As a small business owner, you have several retirement benefits that you can take advantage of. Two retirement savings options for small business owners are a Simplified Employee Pension (SEP) or a single 401(k) plan (Roth or regular).

Contributions to both plans are tax-deductible and grow tax-deferred until you withdraw the money. If you choose the solo Roth 401(k) plan, your contributions are taxed, but your withdrawals are not. The advantage you get as a small business owner is that for a single SEP and 401(k), you can contribute 25% of your net self-employment earnings up to a maximum limit of $66,000 for 2023.

2. Not having enough life insurance

Small business owners are often unprepared for retirement simply because they haven’t planned for it. One of the most critical mistakes made is not having enough life insurance. Many times, small business owners try to juggle expenses from both their business and their family life, forgetting the important purchase of life insurance. Small business owners also have an additional liability from their businesses. Unfortunately, nearly two in five (38%) of small business owners do not have enough life insurance to protect their business. The average life insurance gap for a small business is $1.38 million.

Adequate life insurance ensures that a family’s financial security continues after the death of a beloved small business owner who may have been their family’s primary breadwinner. It also ensures that in the event of an untimely death, any dependents continue to be insured and any debt incurred by the small business is properly paid. Additionally, if you have business partners, primary life insurance can help smooth the transition of ownership in the event of disability or critical illness. Adequate life insurance is essential to ensure peace of mind and ensure financial stability in retirement.

3. Assuming you don’t need help

Another mistake many small business owners make is assuming they don’t need help when it comes to retirement planning. When you need help with business marketing, accounting, HR or logistics, it makes sense to hire specialists and experts to help. The same goes for your finances.

There are many different components involved in managing your finances in retirement, including investments and taxes. Having someone knowledgeable help you can save you time and money in the long run and ensure that all your bases are covered when it comes to your retirement savings plan. This includes creating an exit strategy for your business as well.

Retirement planning is essential for any small business owner who wants to have a comfortable lifestyle after deciding to step away from their business. While it can be easy to make costly mistakes along the way, understanding these common pitfalls can help you avoid them in the future and set you up for success in retirement. With careful planning and professional help, you can ensure that all your hard work pays off.