How to Plan for Retirement as a Small Business Owner

Written by : Knowledge Center Team

2022-02-08

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Retirement is likely to be the last thing on your mind if you are a small business owner. Running a business is not an easy thing to do and it takes all your blood and sweat. The whole day can thus go to planning for your small business.

Giving all of your time and money to your small business may seem a good option, but it can trouble you later. Sooner or later, you will have to let go and retire. How will you manage the expenses of your family and yourself then?

If you are an employee then you are required to contribute to retirement funds such as Employee Provident Fund. This is matched by the employer as well. But as a business owner, you do not have these available to you. This makes saving for retirement even more important. It is essential to have a financially secure future.

You must be wondering where and how you could start? How to plan for retirement. Don’t worry. In the following section, we will share with you some tips for robust retirement planning as well as some investment that you can make for retirement.

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Retirement Planning as a Small Business Owner

Retirement planning takes a lot of thought and time. Here are some tips that can help you get an idea about how to plan for retirement.

1. Always Save

No surprises here! The most important tip to plan for your retirement is to save money. As a small business owner, you are likely to invest all the money in your business. But if you want to take care of the future, you need to start saving for retirement.

2. Use Safe Investments

Saving is important, but not the only thing that you require. You should find investments where you can put your money. Investments are a key to a secured future and thus, retirement.

Being in a business is much riskier than being employed or following a profession. So it will be better to prioritize safety in investments.

Safe investments are those that can offer you steady returns and involve a lower risk or no risk. These options are best suited for the businessman as these investments can act as a cushion and bring the stability you require.

3. Keep Retirement Savings Untouched

This is one of the most important tips to plan for your retirement. Even if you do start saving you might get the urge to keep taking money out from the amount you save. Note that the key to a good retirement corpus is to allow as much time for it to grow as you can.

Your savings should not be only for retirement purposes. Maintain other savings that you can use in need, but do not withdraw from the savings you make for retirement until it is necessary.

4. Have a Contingency Plan in Place

‘Nothing’s for sure, that’s for sure’ this quote perfectly describes the uncertainty life possesses. The coronavirus pandemic that shook the whole world is proof of that. Thus, you need to be prepared for these contingencies by having an emergency fund by your side.

5. Set Up an Emergency Fund

An emergency fund will be useful if any contingency falls upon you or your family and will help you to get back on your feet quickly. You can set up your fund and add money to it.

Keep this fund liquid. This will make sure that you do not have to reach your pocket or any other investment when you need the money.

Here are a few other things that your contingency plan must cover

- Term Life Insurance

- Health Insurance (Mediclaim & Critical Health)

- Disability Insurance

- Accidental Insurance

Best Retirement Investments for Small Business Owners

As a small business owner, you need to secure your future as well as grow your capital. The following investments can help in retirement for a small business owner.

Public Provident Fund (PPF)
New/National Pension Scheme (NPS)
Unit-Linked Insurance Plans (ULIP)

1. Public Provident Fund (PPF)

This is one of the safest investments you can make for your retirement. PPF scheme is backed by the government and has minimum risk involved. With PPF, you can avail of tax benefits as well.

You can choose to invest in PPF if you are looking for an option with a long-term horizon.

Here are some features of this scheme:

- PPF offers an attractive rate of interest considering its safety. The current interest rate is 7.1% p.a (as of January 2022)

- You can invest up to Rs 1.5 lakh every year

- The duration of this scheme is 15 years, after which you can extend the account in tranches of 5 years

- Interest earned from the PPF is tax-exempt along with maturity value

2. National Pension Scheme

It is a great investment that can help you increase your corpus as well as take care of you after your retirement.

Like PPF, this scheme is also backed by the government, but unlike PPF, it does not have fixed returns. Funds in NPS are invested in securities such as equity, government bonds, liquid funds, etc.

- In NPS, you can choose the securities in which you want to invest

- It offers you two options

Auto rebalancing
Active Option

- Once invested, you can avail your corpus only after you turn 60

- You can withdraw a maximum of 60% of your funds. 40% is to be invested in the PFRDA scheme

- It is eligible for tax benefits u/s 80C and 80CCD

NPS is a managed portfolio investment that allows you to grow your retirement corpus with market-linked investment. You can also choose to avoid stock market investment completely.

3. Unit Linked Insurance Plan

ULIP allows you the opportunity to invest in the market and grow your corpus and at the same time, offers you life coverage. Thus, with ULIP you get both insurance and investment from one plan.

- ULIPs have a lock-in period of 5 years

- Partial Withdrawals are allowed in ULIPs after the lock-in

- It is eligible for tax benefits u/s 80C and section 10(10)D

How to Use ULIP for Retirement Planning?

You can invest in ULIPs like Invest 4G from Canara HSBC Life Insurance for up to 100 years of age. This allows you to build a significant corpus in the plan during your younger years, and use this to draw a tax-free pension later.

a) Invest in a mix of debt and equity
b) Invest yearly or quarterly as per your convenience
c) Use portfolio strategies to manage portfolio risk with market movements automatically
d) Continue to invest until you decide to relax and enjoy retirement
e) Start partial withdrawals using systematic withdrawal to create a steady pension

Invest 4G also allows the following booster benefits for long-term investors. They add to your portfolio growth free of charge:

Loyalty Additions
Wealth Boosters

Though as a business owner, there is no specific age for retiring and you can continue for as long as you want, sooner or later you will want to take time off and enjoy your hard work. Thus to make this possible planning early for retirement is essential.

Disclaimer: This article is issued in the general public interest and meant for general information purposes only. Readers are advised to exercise their caution and not to rely on the contents of the article as conclusive in nature. Readers should research further or consult an expert in this regard.

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