How Many Small Business Owners Plan to Finance Their Retirement
Some small business owners refuse to stress about meager retirement savings. When the topic comes up, they point out that when they retire, they’ll sell the business they created and use the proceeds to fund their golden years.
In theory, it’s a good plan. There’s just a few problems.
One potential issue many business owners may encounter is that selling the fruit of the labor isn’t always as easy as they hoped. Many buyers hope that if they drag their feet long enough, the asking price will drop. Others are reluctant to take on small business when the success revolves around the owner. In other cases, potential buyers were scared away because they didn’t think that the industry would remain solvent enough for the business to be a solid purchase.
Another problem is how much debt is connected to the business. Following the sale, the owner may still have to pay off the mortgage and other outstanding business expenses, which can eat into the final sale price, often times significantly reducing the amount of funds left to retire on.
Conventional Retirement Savings for Small Business Owners
Not all small business owners in the United States plan on relying solely on the sale of their business to finance their retirement. Some have worked hard and created conventional retirement accounts for themselves. These conventional methods include:
• Participation in profit-sharing programs
• Regularly contributing to a 401(k)
• Setting up a Roth IRA fund
• Real estate investments
While these represent sound financial plans, it’s important to recognize that they’re not perfect. Each of these savings programs are challenging to predict, and the account holder has a limited amount of control regarding the long-term outcome.
Saving for Retirement with a IUL
Small business owners that realize the need to have a diverse portfolio before they retire have started using indexed universal life (IUL) to save for their future.
A IUL is a universal life policy that differs from other types of life insurance because both the premiums and the various components are flexible. It is also a type of insurance that not only provides death benefits, but can also help small business owners save for retirement.
One of the biggest factors that sets IULs apart from variable universal life insurance policies is the cash component. While most life insurance policies have a maximum final rate, IULs don’t. The indexed amount is linked to the market’s performance.
IULs do have a maximum amount they can earn each year, but most small business owners that purchase this type of insurance feels that since there’s also a floor rate, the limited earning potential is worthwhile. The floor rate also protects the policy holder if the market performance is not favorable so that they never have to worry about losing everything connected to the policy.
It’s important to note that IULs have a tax-free death benefit which can spare your beneficiaries from having to worry about inheritance tax.
Additional benefits connected to the cash component of IULs include:
• Tax deferred growth
• The ability to remove funds when needed without having to worry about paying income tax
• Gains are reset at the start of each fiscal year
• In some states it’s protected from both lawsuits and creditors
• Market loss protection
Retirement is an important topic that small business owners may want to consider thinking about earlier in the planning phase. For some a part of that planning process could include meeting with a financial professional to discuss all options which could include purchasing an IUL policy. Remember, setting aside just a few dollars a week adds up and can often make a positive impact in your client’s retirement years. Contact IFN today for more information!