Delaying retirement savings, in order to invest in your business or other goals is a common refrain amongst the self-employed. It makes sense. We’re focused on the business, not the future. Or, if we think about the future, we imagine the business will fund it.
This can often result in getting started at a later age for the self-employed. By the time you turn 40, you might have started several businesses and have only begun to really see significant success. In the meantime, you’ve dealt with years of variable income. It’s typical to now look at the retirement accounts and think, “I need to catch up.”
As a financial advisor, I’ve worked with many people who didn’t begin seriously saving until later in life.
Some were paying off student loans along with the business. Others were raising children or dealing with family concerns. Many simply didn’t have the income or opportunity to save much in their earlier years. For business owners out there, it’s time to finally begin focusing on a future when your business may not serve as your income source.
The good news? While starting early helps, there’s no time like the present. And you still have plenty of time to catch up.
Stop Looking Back
The biggest obstacle for many late starters isn’t money, but regret.
It’s easy to focus on what could have happened if you had started investing twenty years ago. Unfortunately, that exercise doesn’t improve your retirement outlook. It simply makes the starting line feel even farther away.
Instead, focus on the variables you can control today.
How much can you save?
How long do you expect to work?
How should your investments be allocated?
Those decisions will have a much greater impact on your future than dwelling on what you didn’t do in the past.
Retirement planning is about making the best decisions from where you stand today, not focusing on your hopes of the past.
Save More Than You Think You Need To
If you’re beginning after 40, one advantage you often have is higher earning power. This can be especially true for business owners seeing significant profits for the first time.
Many business owners reach their highest-income years during their 40s and 50s. That creates an opportunity to accelerate retirement savings in a way that simply wasn’t possible earlier in life.
I’ve seen business owners use cash balance plans to supercharge their savings in a few years. I’ve seen them use 401k tools to maximize their efforts. And I’ve also seen others who wait and wait and wait. You can guess which circumstances turned out best.
Rather than focusing solely on percentages, turn your attention to increasing the dollar amount you’re saving each year.
Each raise, bonus, or increase in business profit creates an opportunity to direct more toward retirement before lifestyle inflation absorbs it.
It’s also important to look at the type of retirement vehicle to maximize savings for you, within your business.
You may not be able to make up for every year you didn’t save, but consistent, meaningful contributions can still build substantial wealth over the next 20 to 30 years.
Take Advantage of Retirement Accounts
Tax-advantaged retirement accounts become even more valuable when time is shorter.
If you’re self-employed, explore options like a Solo 401(k) or SEP IRA. These accounts often allow significantly higher contribution limits than many people realize while also reducing current taxable income.
As you approach age 50, catch-up contributions become available for many retirement accounts, allowing you to save even more each year.
These aren’t just retirement tools they’re also tax planning opportunities.
Don’t Overweight The Value of the Business
One reason business owners delay saving for long-term goals is that they’re convinced they can sell their business at a hefty valuation.
Often, it doesn’t work that way.
Instead, you’re possibly putting you and your family at risk because of the belief of the value of the business, without any proof to support it.
Selling a business comes with a lot of risk. You can only sell at a price someone will buy it for. What if the price comes in significantly lower than you expect? What if dynamics change within the industry, turning your great idea into an old one? What if your presence drives most of the profits, and that would disappear without you there?
A buyer will not purchase your business, or purchase it for the price you want, if the reality of operating the company doesn’t match your rose-colored vision. Often, the buyer will want the company for something far different than you imagined it for.
That’s why it’s important not to put all your eggs on the sale of the business. Instead, build value from the business throughout your life, protecting your future in the process, and treat a sale as icing on the proverbial cake.
Focus on the Entire Financial Picture
Retirement savings are only one part of financial planning.
If you’re starting later, it’s equally important to look at the rest of your financial life.
Paying down high-interest debt may improve cash flow and increase future savings capacity.
Working a few extra years may dramatically improve retirement readiness while shortening the number of years your savings need to support you.
Delaying Social Security benefits could increase your lifetime income.
Incorporating your partner in the business may boost everyone’s outlook.
Reducing unnecessary expenses may allow you to save more without significantly affecting your lifestyle.
A strong retirement plan doesn’t rely on one decision. It combines many good decisions over time.
But it’s important to get started. The big difference between starting a business at 25 versus 40-plus? You must get started sooner rather than later, when it comes to saving for retirement.
