Most entrepreneurs are all-in kinds of people. When they launch their companies, they put everything on the line, including their retirement plans.
Some people tap retirement savings to start their businesses or delay saving for retirement while they get their business off the ground. One business owner told me, “If this company goes down the tubes, everything else goes, too.”
That’s OK, but only for a short while. You can make up a gap in your retirement savings history that lasts for a year or two but don’t let it go on longer than that.
Here are five of the top strategies entrepreneurs use to protect their own futures at the same time they take one of the biggest risks in life: starting a business.
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1. Build the Cost of a Salary for Yourself, Plus Benefits, Into Your Business Plan
While you get your company off the ground, it’s OK not to take a salary. But there should be a light at the end of that tunnel. If your company isn’t supporting you, then you haven’t built a business you’ve established a below-minimum-wage job.
Implicit in this is the idea that you need to set a time limit for yourself. The most important way you protect your future is to call it quits when one idea isn’t working. If you are launching an online company, for instance, you’ll probably know within a year, or less, if the business model is working.
2. Decide Which Savings Vehicle Is Right for You
There are three great options specifically for business owners. You can also use a Roth IRA, which has its own set of advantages, especially for people who are comfortable paying more taxes now in exchange for a tax break during retirement.
The three kinds of plans geared specifically for business owners are the Solo 401(k), which allows you to save as much as 100 percent of your earned income, up to a maximum of $53,000 (in 2106) in a plan that covers you and your spouse. A SEP IRA allows you to save 25 percent of your compensation, again up to $53,000.
Simple IRAs are geared more toward businesses that have employees they are low-cost ways to set up a retirement plan for your small company. But they can also enable a business owner with a very high income to save a huge amount in a retirement plan, up to two percent of your income, via a contribution from your business. Notice the big numbers in plans geared to small business owners, which lead to the next strategy.
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3. In the Years When You Have Flow, Max Out Your Contribution
The most distinctive feature of entrepreneurs’ personal finance is the inconsistency of their income. You know that your income can ricochet from great in some winning years to poor during the startup years or when the economy takes a dive. So in the years when it’s good, pay yourself to the point where it hurts: You don’t know what the next year will be like.
4. Automate Your Savings
Set yourself up with an automatic deduction from your bank account to a retirement account. If it’s for you as an individual, you should find one at a brokerage like Schwab, Fidelity or Vanguard. If you do end up setting up a retirement plan for your company, and take part in it, you will have to find a brokerage or investment advisors to help you administer group plans. Then, in addition, when tax time rolls around, use a supplemental contribution to your SEP or Solo 401(k) to lower your tax bill. Most people need to save 10 to 15 percent of their income.
5. Take Advantage of Your Nerves of Steel
If you are an entrepreneur, you’re in the business of calculated risks. Most investing advice is geared toward cautious souls, who might be tempted to panic in a downturn and sell their stock holdings at just the wrong time. Typical portfolios are diversified, with a fairly high allocation to bonds or asset classes that leaven stocks’ volatility.
But you are made of stronger stuff: If you think you can sustain your nerves through a downturn and wait for the uptick in the market that is (almost) sure to come, take advantage of your higher risk tolerance to load up your portfolio with a higher allocation to stocks. A purely rational person would allocate an entire portfolio to stocks because that is historically the highest performing asset class.
You might not be purely rational, but if you’re young and have the wherewithal, a portfolio that is 70 to 80 percent stocks has a better chance of making more money over the long haul than one that is 50 to 70 percent in stocks.
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As a business owner, you’re busy taking care of everyone else but yourself. Your company comes first, then your employees. But as invincible or active as you feel now, someday you will slow down. When that day comes, you need to be prepared with a healthy retirement portfolio.