by Neil Jesani the CEO of BeamaLife

A recent Wall Street Journal study showed that more than half of the 799 small business owners surveyed, 56% considered their business as their retirement plan, or at least had their retirement plan tied to their business.  And because of the economy, most of them are expected to retire after age 65.

This statistic disturbed me! How can anyone tie up all of their money and time into one retirement plan option?

Now don’t get me wrong.

As someone who runs one of the fastest growing, privately held online life insurance brokerage firms in North America, I know how important it is to re-invest in your business.  I understand that part of the entrepreneurial dream, involves building a business and then selling it when you hit retirement age so you can spend the rest of your life relaxing and doing just what you want with your days and nights.

The Harsh Reality and Why You May Be Working Longer in Your Business More Years Than Planned…

In today’s tough economy you can be working many more years than you’d planned since there is no guarantee that you’ll get the price that you’re asking for when you sell your business. I don’t want to be a downer but four years ago, the median asking price for a small business was about $225,000, and the median sale price was about $200,000.  Now, the median asking price is about $175,000, while the median sale price is less than $150,000.  That’s a big change in just four years.

That’s why many small business owners who are reaching the age of retirement are finding themselves in a situation like a 62 year old catering business owner who was recently featured in a Wall Street Journal article. The owner is stuck in “business purgatory” – not successful enough to sell the business for a big profit and without enough available in his retirement account to support his high net worth lifestyle that he’s become accustomed to.

Yes, you need to work on your business and re-invest in it.  But at the same time, you don’t want to be stuck in business purgatory. You want to build a secure future for yourself.

How Small Business Owners and Entrepreneurs Should Be Investing Their Money for a Secure Retirement

Those small business owners who do not tie all of their retirement funds to the business usually  focus on only one retirement investment strategy – the 401(k). In reality, there are quite a few retirement options specifically designed for small business owners who want to cut taxes and position themselves for a comfortable retirement. These options include:

Profit sharing and SEP plans – These plans were officially created by Congress as an income tax and retirement planning tool for high earning, self-employed physicians, professionals and business owners. With these plans, you define the contribution you make. For example, you would contribute lesser of $50,000 or 100% (25% for SEP plan) of participant’s compensation to your defined contribution plan. For example, a business owner makes $100,000 in W2 income from his or her business. That business owner could contribute lower of $50,000, or 25% of compensation. Since that amount would total $25,000, he or she would contribute the lower amount to their defined contribution plan like SEP.

    Defined Benefit Plan – In a defined benefit plan, a business owner does not define the contribution made to the plan, but rather, the amount of the retirement benefit at the retirement age. Based on your current age and income in relation to your intended age of retirement, you must establish how much to contribute annually to the defined benefit plan to ensure adequate benefits at retirement. Essentially the biggest bonus to a defined benefit plan is that it will give you a significantly larger deduction, up to $250,000, as compared to the maximum of $50,000 limit for year 2012 deduction from a defined contribution plan.

      7702 Private Pension Plan – This plan is “America’s Best Kept Secret” as it has two components that work symbiotically.  The first component has a cash account which enables you to:

        • Contribute after tax dollars
        • Earn compounding dividends on the contributions – tax deferred
        • Take advantage of tax advantaged withdrawals as unlimited withdrawals are allowed before age 59 ½ without penalties, unlike a ROTH IRA or a traditional IRA.

        The second component to the section 7702 plan is a life insurance program. If the account holder passes away, it pays a death benefit to the designated beneficiary. The death benefit is typically 3-6 times the invested amount – depending on your age.  Furthermore, if the account holder passes away, the death benefit or cash account, whichever higher is paid to the beneficiary tax-free.

        Now, it’s never too late nor too early to start investing for a secure retirement. You don’t know what the future has in store for you, your family and your business. So, don’t count on your business as your sole retirement funding source.

        About the Author:

        Recognized by the Consumers’ Research Council of America as one of “America’s Top Financial Planners”, BeamaLife CEO Neil Jesani helps small business owners create new wealth, protect their assets, secure their retirement and cut their taxes using nonconventional life insurance strategies. Download Neil’s guide on “How to Receive Additional $250,000 Income Tax Deduction Through a Defined Benefit Plan.”