One of the joys and pains of being an entrepreneur is having complete control over your business destiny.  A joy because you control what happens in virtually every aspect of the business.  A pain because you are also in control of one aspect that transcends the lifespan of your business, your retirement.

There are several factors to consider when thinking about retirement such as…

  1. When do you want to retire?  This is important because it will determine how many years you have to plan and save.  Many people in the current workforce cannot count on Social Security as a supplement to their savings so it is necessary to plan as if those funds won’t be available.
  2. What will you do during retirement?  For some people, their ideal retirement involves traveling all over the world while others want a beach house in Florida.  The difference between those visions also require a different amount of money for living expenses.
  3. How much do you plan to spend annually during retirement?  Consider the vision that we just discussed.  How much will you need each year to do the things that you envision?
  4. How long will you stay retired?  Many retirees end up reentering the workforce because they don’t have enough assets to allow them to stay retired so they have to go back to work so that their funds are not depleted.
  5. Where will you save for retirement?  As you get closer to retirement, you will want to maintain a more conservative portfolio whereas when you are 30-40 years away, your portfolio can tolerate more risk (as much risk as you are comfortable with).

Let’s take a look at what this scenario might look like… in 25 years I want to be retired with a house that is paid for on a golf course in Florida and take one international trip per year.  I don’t like to take a lot of risk in life so I would probably prefer a more balanced portfolio (not all high-risk stocks but not all bonds or cash, a combination).  I anticipate being retired for approximately 25 years and to spend about $50,000 per year since my house will be paid for.  At a baseline, I would need $1,250,000 on the day that I retire.  Working with a financial adviser, I can find some creative ways to save this amount as well as develop a strategy that will allow me to draw funds each year without depleting my assets.

I know you may be thinking that this is a lot to consider but these are some of the questions that a financial adviser should ask when helping you to set up a retirement plan.  Consider it a red flag if you are working with someone who does not think about your financial goals rather just investing your money.

Gwen Moran wrote the following article for Entrepreneur.com listing five retirement options for your business.  Review these and be prepared to discuss with your financial advisor.

Owners of small and midsize businesses don’t save enough for retirement. A March 2010 report released by the SBA found that only 36 percent have an IRA, and only one-third of those contributed to it. Less than 20 percent participate in 401(k) plans.

Finding the right plan can be confusing, “especially if the business changes or grows,” says David Boucher, senior vice president of corporate benefit services at Longfellow Benefits, an insurance brokerage and consulting firm in Boston. But something is better than nothing. Use our chart below to get familiar with the options. 

SEP-IRAs

  • Suggested for: Businesses with no employees
  • Contribution thresholds: Up to 25 percent of up to $245,000 or $49,000 for 2010 and 2011
  • Of note: Easy to set up through most major financial institutions or benefits consultants. Low administration fees.

Simple IRAs

  • Suggested for: Businesses with fewer than 100 employees
  • Contribution thresholds: Employee contributions may not exceed $11,500 for 2010 and 2011; combined employer and employee contributions may not exceed $16,500
  •  Of note: Easy to set up and maintain. No testing or compliance issues. Not permitted for businesses with more than 100 employees.

401(k) plans

  • Suggested for: Businesses with more than 25 employees (varies, depending on fees)
  • Contribution thresholds: Contribution limit is $16,500 for 2010 and 2011 and subject to cost-of-living increases dictated by the IRS after 2011
  • Of note: Administration fees can be steep–up to several thousand dollars, depending on the number of employees. But, participants can borrow against their contributions, making this an attractive investment option.

Cash balance plans

  • Suggested for: Professional services firms and other businesses with employees with high discretionary income
  • Contribution thresholds: Defined by plan and market rates
  • Of note: This type of defined benefits plan allows a participant’s account to be credited each year with a pay credit, such as 5 percent of compensation, and an interest credit, which is typically a fixed rate or a variable rate linked to an index. The ultimate payout is not affected by market rates, but adheres to the benefits put forth when entering the plan. Administration fees may be several thousand dollars.

Profit-sharing plans

  • Suggested for: Businesses with employees and profits
  • Contribution thresholds: The lesser of 25 percent of compensation or $49,000 in 2010 and 2011, with cost-of-living adjustments in later years
  • Of note: This type of plan is funded by employer contributions only and those contributions are completely discretionary. Annual filing of IRS form 5500 is required. Profit-sharing plans can be used in conjunction with other types of retirement plans.

Gwen Moran is a freelance writer and co-author of The Complete Idiot’s Guide to Business Plans (Alpha, 2010).

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