Entrepreneurs are a special breed in the world of personal finance. Unlike most of us, they’re not expecting a steady paycheck every couple of weeks. Their personal financial planning needs can be much more complicated, as can their retirement planning.
We’ve reached out to Mitch Reiner to get the skinny on how entrepreneurs should manage their retirement planning.
Q: Why are entrepreneurs typically so bad at planning for retirement?
Just like everyone else, it's because retirement seems so far away. Entrepreneurs control things in their businesses every day, and every decision made affects the day-to-day outcome. We can control things with our business with direct decisions. Saving in stocks and which allows the outcome be uncertain and feel uncontrolled is foreign to entrepreneurs.
Q: Why should an entrepreneur save for retirement if they’re planning to sell their business when they’re ready to retire?
- Diversification: Despite your confidence in your business and industry, things could go wrong. An employee could sue you, your industry could take a sharp downturn (tech in 2000 or housing in 2008), you could have employees steal from you, or there could be a million other things that could affect your largest asset.
- Seperation: It's healthy to manage your life responsibly inside and outside the business. You should pay yourself a reasonable wage that covers your living expenses so that you are controlling your lifestyle and spending OUTSIDE of the business. Despite the fact that it would be nice to “write everything off,” you should know how much your real lifestyle costs you and live within it by paying yourself and living out of your personal budget, not your business one.
Q: What is the first step an entrepreneur should take if they want to start saving for retirement, but they don’t know how?
Determine how much you need to live on OUTSIDE the business and begin living by TSL on your personal income, not the business income. Pay yourself a reasonable salary, save 20% of your salary, and invest your savings as if you were an employee of your own organization (the CEO, of course, but still an employee).
Q: How can an entrepreneur optimize their retirement saving? Can they have the business match their contributions like a traditional 401k?
This completely depends on your type of business and situation. If you are a sole proprietor or partner with a spouse, you can get aggressive with the amount you put in a retirement plan and have your company match. However, if you have a lot of employees, you are bound to do safe harbor contributions and matching and therefore need to take into account the cost of plans and the benefit you are providing to your employees and balance that with the tax savings.
Q: How should their business fit into their retirement planning?
From a future equity value standpoint, it should be a sweetener. While working and growing the business, think of it as a direct way to control your earnings capability and growth. By running your business, growing it and managing expenses, you should be able to “give yourself a raise” and earn more income over time. This would then increase your amount that you need to save because you are abiding by the 20% TSL rule. Then, if there is equity long-term, this is a bonus in the end. Maintain liquidity outside the business. Operate your life as though your business could be taken away from you tomorrow.