Retirement Plans: The Business Owner’s Swiss Army Knife

Retirement Plans: The Business Owner’s Swiss Army Knife

The Swiss Army Knife is an icon of utility and versatility.

Invented in the late 1880s to serve the needs of the Swiss Army, the Swiss Army Knife was designed to open canned food and maintain rifles.

Initially manufactured in Germany, a struggling Swiss entrepreneur named Karl Elsener marketed an improved version with tools on both sides of the handle, restoring his company to prosperity.

Business owners have a tool in their arsenal that, like the Swiss Army Knife, can serve multiple purposes: their retirement plan. 

When properly designed, retirement plans are powerful instruments for achieving the different business objectives you face at every stage in your organization’s lifecycle.

Using Your Retirement Plan To Achieve Your Business Goals

Every business owner has their own set of unique goals. 

In the beginning, you’re likely more focused on growing the value of your enterprise.

As the business matures, you may be more interested in reducing your taxable income or diversifying your assets.

Finally, as you begin to look at selling your business, you may be interested in putting away funds for retirement. 

As outlined below, these goals can be accomplished through thoughtful plan design. 

Growth Mode: Attracting Critical Employees

Early in the business, your goal is to get the business off the ground, meaning you likely need to attract mission-critical employees. 

The problem is mission-critical employees tend to be heavily recruited by competitors.

Having a competitive retirement plan in place is table-stakes. 

At this stage, your focus should be: 

1) Offering a plan.

2) Putting some sort of match in place.

A 401(k) plan probably makes more sense at this stage, though early on, you might look into a SEP-IRA.


Efficiency Focus: Reducing Your Taxable Income

Owners of more established enterprises might be interested in reducing their taxable income. 

Any time you make a tax-deductible contribution, it reduces your taxable income by the contribution amount, which can result in significant tax savings.

If this is your goal, a 401(k) plan, particularly one that utilizes features like Safe Harbor and Profit Sharing, should be explored.

If you have less than 50 employees and take home more than $250,000 in income annually, a cash balance plan, which allows you to put $100,000 or more away every year, might be worth exploring. 

Strategic Thinking: Diversifying Your Assets

80-85% of your net worth is likely tied up in your business. 

This means a substantial portion of your net worth is in one basket. 

This is risky for two reasons: 

  1. 70% of businesses are unable to be sold.
  2. If something were to happen unexpectedly, the business is not guaranteed to sell at an acceptable value.

By contributing to a retirement plan that invests in stocks, bonds, or other assets outside the business, you can diversify your portfolio and reduce the risk of being caught empty-handed.

Exit Planning: Retirement Savings

Retirement plans also serve their primary purpose: saving for retirement. 

It is unlikely that the proceeds from your business sale will be able to replicate the income you received from your business.

If retirement is a primary goal, you’ll want to design a retirement plan that disproportionately benefits you as the owner.

Having a well-funded retirement plans ensures you’re working on your terms: because you want to, not because you have to. 

Once again, looking at a 401(k) plan with Safe Harbor or Profit Sharing makes sense, along with a cash balance plan for smaller organizations. 

Learn More About Unlocking The Wealth In Your Business

A well-designed retirement plan is an essential tool for achieving your business goals at every stage of your company’s life cycle. 

By attracting and retaining critical employees, reducing taxable income, diversifying assets, and saving for retirement, you can build a more valuable enterprise while securing your financial future. 

To learn more, check out our webinar on unlocking the wealth trapped in your business.

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