4 Reasons Entrepreneurs Should Consider a Retirement Plan
Being an entrepreneur is a lot like being a superhero – you work hard, take risks, and push yourself to the limit to achieve your goals. As an entrepreneur, you probably love what you do and retirement may be the farthest thought from your mind. However, funding a retirement plan is crucial for your long-term financial well-being, and not having one can be financial kryptonite.
Even the mightiest of us can fall. As an entrepreneur, you have the unique opportunity to build a business that can provide for you even after you have retired. But without a solid retirement plan in place, you risk not being able to enjoy the fruits of your labor when you are ready to hang up your cape. There are many reasons to consider investing in a retirement plan. Here are four of them.
#1. Entrepreneurs are Optimistic, Dangerously Optimistic.
As an entrepreneur, you are naturally optimistic, confident, and believe in the future of your company.
We love working with and supporting people who are confident, successful, and focused on scaling their businesses while enriching the communities in their economic footprint. Some will be able to turn all that hard work and focus into a considerable payday at some point in the future, setting themselves up for life. However, not every entrepreneur will encounter a white knight ready to purchase their business for millions of dollars. Most will not.
Take some time and think about this for a moment: What is the likelihood that your business will sell for millions of dollars?
The likelihood of a significant exit is less than many expect.
Your confidence may be misleading you.
Many other business owners out there, though confident in the success of their company, are not managing it in a way that would create the conditions for a spectacular future exit. Instead, they are running a “lifestyle” company focused on cash flow and enjoying its fruits while not sowing many seeds.
This is another downside to that optimism. Some business owners are so confident in the day-to-day that they are not focused on the future and conveniently ignore the past.
The last ten to fifteen years have been so easy due to the economic conditions that the financial events of 2008 are a distant memory – if contemplated at all. We have enjoyed an expanding money supply, low interest rates and inflation, and plenty of fiscal stimulus. Prices have gone up, allowing many to cash in for higher profits. Unemployment has been historically low. It has been a fairy tale for many.
Unfortunately, fairy tales end; some of them badly.
The business climate over the last several years has been extremely generous. Yet, as good as it has been, businesses have still failed. The entrepreneur’s optimism can often create a blind spot to this reality, a disconnect between how the average entrepreneur thinks and what actually happens – which leads to the second point.
#2. Investing in Your Own Business is Extremely Risky.
The failure rate for small businesses is very high. Around twenty percent of small businesses fail in the first year and an additional thirty percent fail within the next four years. That means that fully half of all small businesses fail within the first five years of their existence.
The American spirit being what it is, entrepreneurs continue to start new companies, requiring large sacrifices and investment. They hire employees, build websites, pay rent, and build new facilities or renovate old ones.
Entrepreneurs invest in their companies because they are focused on the extremely high reward. Unfortunately, intense focus can numb the reality of the risk.
Investing so heavily in your company is the opposite of diversifying your financial portfolio. You are investing in one company. Catastrophic failure is not something that your family can afford.
Despite the reward, financial prudence suggests to not put “all of your eggs in one basket”. You want to “hedge your bets” when the risk is so high. Those two cliches are time-tested and applicable for entrepreneurs.
#3. A Retirement Plan is a Strategic Tool to De-Risk Your Financial Life.
Investing all of your money in a single investment can be risky because if the investment fails, you could lose all of your money. This is known as concentration risk. Diversifying your investments by spreading your money across different asset classes and investment vehicles can help to mitigate this risk.
A retirement plan is a strategic move for any business owner, regardless of the size or industry. It is crucial to have investments diversified outside of your company. Many entrepreneurs invest all of their money in their own companies, leaving themselves exposed to enormous financial risk. They are left with nothing if the company fails.
A retirement plan reduces this risk. It is essential to have a plan where money is invested in other companies or areas outside of your own business. This may be uncomfortable for some business owners, as you may feel your capital is going to another company, but it is designed to de-risk your financial life. Having a retirement plan is an excellent way to secure the future and provide peace of mind for both the business owner and your employees.
#4. Retirement Plans Themselves Offer Benefits to Your Company.
Retirement plans offer numerous benefits for entrepreneurs beyond simply preparing for retirement. One significant benefit is tax savings, as contributions to certain retirement accounts are often tax-deductible. Additionally, offering retirement plans to your employees can improve employee retention and attract top talent. Company match profit sharing can also incentivize your employees to save for their own retirement, creating a win-win situation for both you and your employees.
For self-employed entrepreneurs, options such as the solo 401k, SEP, traditional IRA, and Roth IRA are available, each with their own advantages and requirements. Ultimately, the savings potential from retirement plans is enormous, making them an attractive option for entrepreneurs looking to reduce their tax burden and secure their financial future.
Rise to the Occasion and Focus on the Future.
It is crucial for entrepreneurs like you to invest in a retirement plan due to the risky nature of your business. As an optimistic entrepreneur, you likely have a blind spot about the risks of failure of your company, making it all the more important to have a backup plan in place. A retirement plan is a strategic way to de-risk your financial life and safeguard your future. Besides providing financial security, a retirement plan offers tax savings and employee retention options.
As an entrepreneur, you must recognize external factors such as a technological tailwind and an accommodative government have contributed to recent success. These conditions will not continue indefinitely. Take the initiative to save and invest your money wisely, ensuring you and your family are protected. Be your own white knight and wield your investment portfolio like a sword.