You have devoted countless hours toward building your business—and it’s safe to say that you probably don’t want to think about the time when you will no longer be able to run the business. But, at the same time, you don’t want to jeopardize all your hard work and put your business at risk because you didn’t have a plan in place to protect your business, your family, your employees and yourself.
Life insurance is one way to help family members lessen the financial impact of the death of a principal of a business. It can provide cash at the time it is needed to finance the purchase of the business or to pay taxes. It is also a way to satisfy other needs of a business, such as meeting payroll or covering business expenses, during the time it takes to settle the estate. Business-overhead insurance is a way of paying your business-overhead expenses, such as rent and utilities, during the time a business owner is disabled. If you have certain employees who are critical to your business’s ability to function, you might consider key-person insurance or business-continuation insurance. This is life- or disability-income insurance purchased by the business and payable to the business.
Beyond insurance, making sure you are on track for retirement is a major concern for everyone. This is especially critical for the small-business owner because a small-business owner is not covered by a corporate pension plan. Small-business owners also have to ensure that their resources and plan arrangements can provide adequately for their own retirement, which could last many years. Life can be unpredictable and, for many, retirement may not be a choice—it can be the result of illness or economic conditions. Even if you do continue working past traditional retirement age, longer life spans make retirement savings that much more important: Today, if you retire at age 65, you can expect to spend another 15 to 20 years in retirement. This is especially important for women, who are expected to live, on average, to age 85 as compared to men living, on average, to 82.
During retirement years, financial challenges include:
Health-care costs. Seniors make up 13 percent of the population, but account for more than 35 percent of all medical-care expenditures, according to the U.S. Department of Labor’s Bureau of Labor Statistics.
Long-term-care costs. More than 70 percent of nursing-home residents are women, according to an AARP Public Policy Institute Fact Sheet.
Steady inflation. Even at a low inflation rate of 3 percent, in 10 years, $10,000 will buy just $7,347 worth of goods and, in 20 years, only $5,437 worth of the same goods.
Fortunately, today’s small-business owner has all the advantages that traditionally have been offered only to big businesses, such as tax shelter, tax-deferred investment growth and business deductions. In addition, there are two major categories of options when it comes to preparing for retirement: defined-benefit and defined-contribution retirement plans.
Defined benefit plans. Also called pension plans, these plans are just as their name implies—they provide employees with a fixed or “defined” benefit at retirement. Defined benefit plans are generally more costly to administer and require annual contributions when investment returns are poor. However, they are an important benefit for you and your employees, and they also allow for higher tax-deductible contributions at older ages.
Defined contribution plans. These plans can take many forms, including 401(k) and profit-sharing plans, SIMPLE plans, Simplified Employee Pensions (SEPs) and Individual Retirement Accounts (IRAs). These plans are flexible and do not require annual contributions; generally, a distribution from either a defined benefit or defined contribution plan is subject to payment of ordinary income tax.
Overall, there is a retirement plan to fit virtually every small business, regardless of size or structure, and these plans can offer valuable tax deductions. Each plan has a unique combination of features and benefits. With the help of a professional, you can identify which plan is right for you and your business.
Chances are, you depend on your business as a source of income for yourself and your family. Your business may also be an investment in your future and a major portion of your estate. Therefore, in addition to creating and maintaining a proper business plan, it’s important to consider your insurance and retirement-plan options carefully in regard to how they can help you pursue your business and personal- finance objectives. It’s never too early to think about planning ahead.
Kemberley Boyer is a financial representative for Phoenix-based New England Financial/Progressive Financial Concepts. For more information on small-business planning, feel free to contact her at 800.877.7798, ext. 243, or at kboyer@pfc.nef.com.
