wealth management strategies for entrepreneurs

3 Wealth Management Strategies All Entrepreneurs Should Know

by Josh Hunter

Entrepreneurs at any stage of their business can get caught up in the most important aspects of growing a company — increasing customers and revenue. They also may be in charge of handling many of the day-in, day-out administrative tasks, such as hiring employees, paying bills and returning calls. As such, it’s easy to lose sight of the forest through the trees, and the wealth building opportunities a business can provide them. In fact, research from Cox Business found that getting rich is not the #1 reason entrepreneurs start a business. It’s actually freedom, satisfaction and flexibility. 

However, initiating solid wealth management strategies can not only help entrepreneurs plan for their personal financial futures but can also provide innumerable benefits for the business, including ensuring business continuity and increasing profitability. Here are three of the  most crucial. 

Set Up a Retirement Plan

Entrepreneurs, and especially those in the growth phase of their businesses, are often hyper-focused on making the financial moves that will most benefit their company. This often means reinvesting every ounce of income back into their operation instead of also setting some aside for their own financial future. In fact, some 34 percent of small businesses owners don’t have a retirement savings plan, according to a 2017 survey of 1,960 small business owners by small business directory provider Manta. 

It’s never too early in the lifecycle of your business to start saving money for retirement. A SEP IRA and an Individual 401(k) are the two retirement plan options best suited for entrepreneur business owners.

Simplified Employee Pension (SEP) IRA

While several different retirement plans exist for sole proprietors, a Simplified Employee Pension, or SEP, IRA is very popular because as its name implies, it’s simple to open up and make contributions to. Entrepreneurs can invest as much as 25 percent of their net income up to a cap that changes periodically to keep up with inflation. The cap for 2021 is $58,000. Contributions to a SEP IRA are also tax-deductible.

If a business has employees, the employees cannot contribute to the SEP IRA, but they can make their own contributions to a Traditional or Roth IRA. As another option, a business that wishes to offer a retirement plan can set up a Savings Incentive Match Plan for Employees (SIMPLE) IRA for their workers.

Individual 401(k)

Another retirement plan option for those who are the sole proprietor of their business is the individual 401(k). Acting as an employee, an entrepreneur can contribute as much as $19,500 to an individual 401(k), or $26,000 for those over age 50, for 2021. Acting as an employer, a business owner can contribute an additional 25 percent of compensation in addition to the regular employee contribution. This allows for a total annual contribution of $58,000 for those aged 49 and under or $64,500 for those aged 50 and up in 2021. This can be a great strategy to make “catch-up” contributions during years when a business is doing well. 

As an additional benefit, a spouse who works in the business can also join the plan. However, this plan is not available to additional employees of the business.

Purchase Commercial Property

Entrepreneurs often overlook a financial strategy that can both build wealth and deliver an additional income stream to the business: purchase the commercial real estate site where the business operates.

While many business owners think that only large businesses or sophisticated real estate investors can pull off something like this, historically low interest rates and attractive SBA loan programs for owner-occupied commercial real estate can make this a possibility. 

For example, an entrepreneur can buy the building in which it operates, and even if the business doesn’t necessarily need all of the space, it can rent out the rest. The additional rental income generated can be used to offset part of the mortgage loan cost. This is a great way to begin to diversify income streams, and avoid concentrating all of assets into a single investment — which is a risky mistake many entrepreneurs make. 

Further, over time, the property gains in value and can be sold years later for an attractive return. 

Exit the Business — and Then Start Another One

While entrepreneurs might be so focused on the success of the business, they need to recognize that nothing lasts forever. True opportunity might rest in building and nurturing the company to a desired level and then exiting.

Serial entrepreneurs start companies, grow them to profitability and then sell them — and then start the cycle all over again. These types of entrepreneurs build up their companies and then hand over the reins to someone else, either by selling a stake in their company while retaining partial ownership or by selling it entirely for a tidy profit. This not only keeps entrepreneurs’ natural drive to constantly innovate and grow satisfied, it also allows them to put themselves in control of their financial destiny, rather than being at the mercy of the ups and downs of a single market. 

Final Thoughts

Still unsure of what options make most sense for you as a new business owner? Be sure to consult with your wealth advisor, who can help you navigate and select the strategies most appropriate for your needs.

Sources:

https://www.businessnewsdaily.com/4652-entrepreneur-motivation-benefits.html

https://www.investopedia.com/articles/managing-wealth/070716/how-serial-entrepreneurs-are-reshaping-wealth-creation.asp

https://money.usnews.com/money/retirement/second-careers/articles/2018-05-11/7-reasons-entrepreneurs-dont-save-for-retirement

https://www.forbes.com/sites/forbesfinancecouncil/2020/03/19/retirement-strategy-for-entrepreneurs-own-your-building/?sh=458b2889270d

https://www.sba.gov/funding-programs/loans/504-loans

https://www.thebalance.com/entrepreneur-retirement-plans-3999869