Retirement — it’s a word that’s the stuff of many people’s dreams.
But what if you’ve been your own boss? Small-business owners still make up the largest chunk of entrepreneurs in the country, making their business their lives’ work.
But if you own a mom-and-pop enterprise, retirement means more than waiting for the years to roll by. In fact, small-business owners face a unique set of questions when it comes to planning for the day they step aside.
Their greatest asset is their business, says Barbara Weltman, publisher and editor of “Barbara Weltman’s Big Ideas for Small Businesses.”
A tax attorney and author of several small-business tax guides published by J.K. Lasser Books, she also owns a small business, BW Ideas (www.bwideas.com).
Weltman says that entrepreneurs considering retirement need to think hard and get good advice from their lawyers, accountants and financial representatives as they make retirement plans. That way, their most important assets will be handled wisely when they retire.
“It’s sometimes tough for independent, hard-working business owners to seek advice,” Weltman says. “Often, business owners will say it’s a question of money, that they don’t like to pay fees. But look what’s at stake. It’s your future. You’d better plan for it.”
• Should I stay or should I go?
Weltman says that one of the most important factors in retirement planning is purely psychological: Whether the owner can decide to do it.
It’s not a simple question for most entrepreneurs.
Often, individuals poured lifetimes into building successful enterprises and it’s not easy to simply walk away. They love what they do and might even plan to keep working for the rest of their lives.
An entire family might have been an integral part of building a business, as well.
Besides, the work force is no longer a place where age 65 means you automatically hit the golf course, says Weltman.
“The reality today is fewer and fewer people retire today cold turkey,” she says. “I describe it as, ‘We are hungrier and healthier.’ Today, 65 is considered young. Also, most people don’t have such an enormous retirement portfolio that they can afford to completely walk away.”
A person who owns a business needs to ask hard questions, including, “Do I really want to quit — or do I need to quit?”
“You might have to stay in the work force a little longer,” Weltman says. “But you really need to know when to fold.”
A “phased retirement,” in which the owner quietly but purposely begins to sever ties to the office or plant is something to consider.
How the small-business owner plans for retirement depends greatly on the type of business and questions of ownership, such as co-owners.
If there are co-owners, all the partners should have a “buy-sell” agreement. It’s a written description of how buyouts will be handled and funded.
And what about family members? Retirement means that Mom needs to consider whether her daughter is ready to take over the family business and if the business if ready for the transition.
If a child or other family successor isn’t available, the other option might be the least palatable but the most practical: Selling out to a competitor.
• Your papers, please?
Small-business owners often have their own retirement plans that sock away money for post-career income.
But does your plan have all its paperwork in order? Weltman says many business owners might lose their retirement income simply because they haven’t filed the correct documents.
Over the last several years, Congress made changes to the rules governing qualified retirement plans. Most of the rules, says Weltman, are highly favorable to the self-employed and small-business owner.
The changes allow entrepreneurs to establish savings plans and trusts for retirement, as long as they offer the same plans to their employees.
But many small businesses use prototype plans from brokerage firms, insurance companies, banks and mutual funds.
The Simplified Employee Pension (SEP) IRA is a retirement program for self-employed people or owners of small companies allowing them to defer taxes on investments intended for retirement. In a SEP the employer makes contributions to his or her own Individual Retirement Account (IRA) and the IRAs of his or her employees.
The Savings Incentive Match Plan for Employees (SIMPLE) is a retirement plan for companies with fewer than 100 employees in which employees receive matching funds from their employer. A SIMPLE plan may be structured as either a 401(k) or an IRA.