How to Retire as a Small Business Owner: Key Financial Steps

Many small business owners focus on daily operations and growth but often neglect retirement planning. Without employer-sponsored plans, they must take proactive steps to secure their financial future. A solid retirement strategy includes setting financial goals, structuring savings, planning an exit, and considering tax implications.

Setting Retirement Goals

Retirement planning begins with defining financial independence. Some business owners plan to step away entirely, while others prefer a gradual transition or new ventures. Estimating future expenses—including housing, healthcare, travel, and lifestyle—helps determine savings needs. Inflation also plays a role, requiring a buffer in projections.

Expected income sources influence savings goals. Social Security benefits, based on lifetime earnings, provide some support but rarely cover all expenses. In 2024, the maximum monthly benefit at full retirement age is $3,822, though most receive less. Business owners who underreport income to reduce taxes may find their benefits lower than expected. Other income streams, such as rental properties, dividends, or annuities, require careful planning to last through retirement.

Healthcare costs are a major factor. Medicare eligibility begins at 65, but it doesn’t cover everything. Premiums for Medicare Part B, supplemental insurance, and out-of-pocket expenses add up. Long-term care, which Medicare doesn’t cover, can cost thousands per month. Planning early helps prevent financial strain later.

Evaluating Business Worth

Determining a business’s value is crucial for retirement planning and exit strategies. Profitability, assets, liabilities, industry trends, and future earning potential all impact valuation. Buyers—whether family, employees, or external investors—examine financial statements, market position, and operational efficiency.

Financial metrics are key. Earnings Before Interest, Taxes, Depreciation, and Amortization (EBITDA) is a common profitability measure. A business’s valuation often applies an industry-specific multiple to EBITDA. For example, a small manufacturing firm might sell for four to six times EBITDA, while a high-growth tech company could command a higher multiple.

Intangible assets also contribute to value. Brand reputation, customer loyalty, and proprietary processes make a business more attractive. A company with recurring revenue, long-term contracts, or a competitive advantage is worth more, while one reliant on the owner’s direct involvement may be seen as risky.

Buyers conduct legal and financial due diligence, examining tax compliance, outstanding liabilities, intellectual property, and regulatory obligations. Keeping financial records accurate and up to date prevents disputes and streamlines sales. A business appraisal from a Certified Valuation Analyst (CVA) or an Accredited Senior Appraiser (ASA) provides an objective assessment and sets realistic expectations.

Retirement Plan Structures

Small business owners must establish their own retirement savings plans. Several tax-advantaged options exist, each with different contribution limits, tax treatments, and administrative requirements. The right plan depends on income, number of employees, and long-term goals.

SEP IRAs

A Simplified Employee Pension (SEP) IRA allows business owners to contribute a percentage of earnings toward retirement while also benefiting employees. Contributions are tax-deductible and grow tax-deferred. In 2024, the maximum contribution is the lesser of 25% of compensation or $69,000. Only employers can contribute—employees cannot.

A key advantage is flexibility; contributions can vary based on profitability. However, if a business has employees, the owner must contribute the same percentage for all eligible workers, which can be costly. Withdrawals before age 59½ incur a 10% penalty plus income tax. Required minimum distributions (RMDs) begin at age 73 under the SECURE 2.0 Act.

Solo 401(k)s

Designed for self-employed individuals or business owners without employees (except a spouse), a Solo 401(k) allows both employer and employee contributions, enabling higher savings. In 2024, the employee contribution limit is $23,000, with an additional $7,500 catch-up contribution for those 50 and older. The employer portion can be up to 25% of compensation, with a total contribution limit of $69,000, or $76,500 with catch-up contributions.

A major benefit is the option for Roth contributions, which are taxed upfront but grow tax-free. Solo 401(k)s also allow loans of up to $50,000 or 50% of the account balance, whichever is lower. However, once assets exceed $250,000, IRS Form 5500-EZ must be filed.

SIMPLE IRAs

A Savings Incentive Match Plan for Employees (SIMPLE) IRA is for small businesses with 100 or fewer employees. It allows both employer and employee contributions with lower administrative costs than a traditional 401(k). In 2024, employees can contribute up to $16,000, with a $3,500 catch-up contribution for those 50 and older.

Employers must either match employee contributions up to 3% of compensation or make a fixed 2% contribution for all employees. This mandatory contribution cannot be adjusted based on business performance. SIMPLE IRAs also have stricter withdrawal rules—early withdrawals within the first two years incur a 25% penalty. Unlike 401(k)s, loans are not allowed.

Roth Options

Roth retirement accounts, including Roth IRAs and Roth 401(k)s, offer tax-free growth and withdrawals. Contributions are made with after-tax dollars, meaning no immediate tax deduction, but qualified withdrawals—including earnings—are tax-free if the account has been open at least five years and the owner is 59½ or older.

For 2024, Roth IRA contributions are limited to $7,000, with a $1,000 catch-up contribution for those 50 and older. Income limits apply—contributions phase out for single filers earning between $146,000 and $161,000, and for married couples filing jointly between $230,000 and $240,000. Roth 401(k)s, available through Solo 401(k) plans, have no income limits and allow higher contributions. Unlike traditional retirement accounts, Roth IRAs are not subject to RMDs, allowing funds to grow indefinitely.

Ownership Transition Methods

Transferring ownership determines both the company’s future and the owner’s financial outcome. Selling to an external buyer often yields the highest financial return but requires extensive preparation. Buyers conduct due diligence, reviewing contracts, supply chains, and competitive positioning. Deal terms—structured as an asset or stock sale—affect taxes. Earnouts, where part of the sale price depends on future performance, can bridge valuation gaps but carry risk.

Transferring ownership to family presents challenges, including balancing fairness among heirs and ensuring the successor is capable. A gradual sale, gifting strategy, or trust arrangement can help with liquidity and estate tax exposure.

Employee stock ownership plans (ESOPs) allow employees to acquire shares over time through a trust. ESOPs provide tax benefits but require compliance with ERISA regulations and annual valuations.

Tax and Estate Considerations

Capital gains taxes apply when selling a business, with long-term gains taxed at 0%, 15%, or 20%, depending on income. Structuring a sale as an installment plan can spread tax liability over multiple years.

Estate planning ensures business assets and retirement funds transfer efficiently. Trusts, such as grantor-retained annuity trusts (GRATs), help minimize estate taxes. Buy-sell agreements funded by life insurance provide liquidity for heirs and prevent ownership disputes.

Balancing Personal Assets and Investments

Diversifying wealth beyond the business ensures financial security. Allocating funds to stocks, bonds, real estate, and annuities creates a more stable foundation. Maintaining liquid assets provides access to funds for unexpected expenses. Strategically withdrawing from retirement accounts optimizes tax efficiency and extends portfolio longevity.