How To Start a Business and Save For Retirement at the Same Time

Starting a business is an endeavor that is not for the faint of heart. It takes up to 24 hours a day, seven days a week, and every bit of your mental and emotional focus, not to mention, in most cases, a significant amount of your life savings.

To muster up that much energy and effort, small business owners have to be an enthusiastic, confident bunch. It’s no wonder, therefore, that with so much passion and effort focused on business success, the average small business owner tends to forget about the importance of saving for retirement.

It’s not that entrepreneurs don’t think that saving for retirement is important. Most simply have other short-term priorities. As a result, according to a national small business survey conducted by Capital One, nearly half of all small business owners are saving less than 10% of their income for retirement—and one quarter isn’t saving for retirement at all.

But even if you are committed to saving for retirement while starting your business, how do you actually go about doing so? What are your options when you have no employer, no set paycheck, and no built-in 401(k) plan?

Let’s walk through the four steps you should take to make sure you’re protecting your personal future while building up your business.

Know How Much You Need

Have you ever thought about what kind of funding you’ll actually need for your retirement? For most full-time corporate workers this question holds some importance, but given the limitations of employers’ preset plans, many may be less likely to give the issue significant thought. As a business owner, though, the amount you save for retirement is entirely up to you—so you should probably start by determining how much you need.

Most financial advisors recommend saving at least 10-15% of your pre-tax income towards retirement. Higher income earners should save at the higher end of that range, whereas lower income earners can more reasonably expect some portion of their retirement benefits to be covered by social security (and therefore save a lesser percentage on their own).

Beyond that rule of thumb, factors like your life expectancy, your current spending and lifestyle habits, and your retirement timeline and goals—such as at what age you plan to retire and how much you want to travel—should also factor in. Consult with an independent financial advisor or use an online retirement calculator to better determine the financial requirements you’ll need to prepare for.

Having a goal in mind and knowing how close or how far away you are from scheduled saving towards that goal will help you to determine how much you should be saving for your retirement in the midst of launching your small business.

Consider Your Retirement Savings Options 

Once you’ve determined how much you need to save for your retirement, you’ll want to choose the best retirement savings account for your business and your life situation. Unlike with a corporate savings plan, as a small business owner, you alone are in control of choosing your best retirement savings plan.

Again, it’s best to work with a financial advisor to make this determination, as once you’ve chosen a savings plan for your retirement, it can be difficult to change. With that said, here’s a brief primer on the most popular types of retirement savings plans for entrepreneurs.

  • SEP-IRAIdeal for solo-preneurs, this straightforward, tax-deductible retirement plan is similar to a traditional IRA. Input maximums are relatively generous, allowing for savings of up to 25% of your income—or a max of $53,000 annually as of 2016.
  • Simple IRA: For small businesses of 100 employees or less, this retirement plan allows for pre-tax investments taken directly from your and your employees’ paychecks. As of 2016, inputs for simple IRA accounts were limited to $12,500 per person (or $15,500 for those aged 50 or older.
  • Solo 401(k): Self-employed individuals and family-owned businesses can save up to 25% of income pre-tax through a solo 401(k) account. This model is particularly beneficial for couples who own or run a business together since it allows for spouses to each save up to $53,000 pre-tax annually—even when filing a joint tax return.
  • Simple 401(k): Also an option for businesses with 100 or fewer employees, the simple 401(k) model allows for a max input of $12,500 annually. Unlike the IRA model, a simple 401(k) offers penalty-free withdrawals if you need to draw from your accounts prior to retirement age.

Put Your Savings on Autopilot

As a small business owner, you’re going to face a constant barrage of decisions that need to be made and changing priorities for your time, money, and attention. Every time you need to think about whether or how much of each paycheck to invest in your retirement creates one more opportunity to let more urgent needs take center stage over your long-term retirement goals. That’s why, when it comes to saving for retirement, your best bet is to “set it and forget it.”

Once you’ve chosen and set up the accounts for your retirement savings and investments, create a recurring transfer from your paycheck that gets deducted each and every month without you having to think about it.

With automatic deductions, you’ll quickly get used to not having that cash on hand. But if you have to decide each and every month whether or not to make the investment into your retirement savings, you may feel more tempted to hang onto your hard earned cash or to invest it into a more immediate business need.

Prioritize Investing in Your Future

Making wiser choices about saving for retirement while starting a business requires backing up from the immediate to focus on the big picture. As much as you don’t want to think about this right now, the reality is that many small businesses fail—and your business more than likely isn’t a forever entity.

The good news, here, is that a failed small business doesn’t equate to a failed life. If this venture doesn’t work, you’ll have other opportunities to start again.

But when it comes to your life, you truly only have one shot. All the more reason that saving for retirement should be a priority even when you’re in the middle of starting your small business.

Author Bio: 

Jared Hecht is the co-founder and CEO of Fundera, an online marketplace connecting small business owners to the best loans for their business. He writes frequently on small business lending and management for publishers like Forbes, Entrepreneur, and Inc.