Retirement in the Beauty Industry

Thanks for allowing me to interview you on such an important topic!  Tell me a little bit about your business and how you help others? 

Thank you for inviting me to speak with you Daniela, I’m excited to be here! To answer your question, I have the privilege of working with smart individuals, business owners and their families to help them make better financial decisions. Everyone’s a little different but regardless of their situation I’m able to help them understand where they stand financially and what they can do better to help them reach their goals. 

For some that may mean paying for a child’s college while paying down their own debts, others are focused on cash flow or a savings and investment plan for retirement, while some of my clients just want to be confident that they’re making the right decisions or confirm that they’ve adequately prepared for a worst case scenario such as an unexpected death or disability. I focus on the client’s goals but also make sure to cover these other areas since most folks just don’t realize how important they are. 

A big percentage of the aesthetic industry are entrepreneurs; they own spas or work in spas as independent contractors.  Even those who are classified as employees often make straight commission so they have to think like entrepreneurs in building their business.  A common concern I hear is in regards to cash flow. What advice would you give to these women in regards to cash flow management so that they can grow their business, pay their taxes,  but still be protected, and make a decent wage? 

Having worked with many small business owners, ranging from just starting to many years in, I know how difficult this is! The most common mistake that I see for sole proprietors is a lack of separation between business and personal cash flow. It makes your life so much easier when there is no overlap in your accounts! It allows you to much more easily put together a monthly statement showing whether you had a profit or a loss and makes sure that you don’t forget about any year end business deductions! I’ve been told this also helps to lower your risk of an audit. 

I highly recommend that businesses have their own checking and savings accounts, from which all expenses are paid and all revenue is deposited. Whether you’re a sole proprietor or just paid on commission, you should have some kind of buffer in your accounts, known as an emergency fund. This buffer will come in handy when you have unexpected expenses or months where your income is less than expected and the amount needed will vary depending on your business and what your monthly expenses are. I usually recommend at least having around 3 months’ worth of expenses that you have to pay no matter what happens, such as your rent, utilities, debt payments, food, supplies etc… 

For many, it can be hard to save for retirement consistently when there seems to be so many expenses that need our attention today but beyond providing for your retirement in the future, saving now also has some huge benefits for a business owner. Can you please explain those benefits? 

This is the perfect follow up to your last questions Daniela because another HUGE problem for small business owners that impacts cash flow is taxes! As a small business owner you not only have to pay individual Federal and State income taxes, you also have to pay an extra 15% or so in self-employment taxes, which fund Social Security and Medicare. One of the reasons retirement planning can be so crucial for a small business owner is that a tax deferred retirement plan, a plan that allows you to save money that hasn’t been taxed, will lower your tax bill! 

To be specific, assume you made $100k last year after your business expenses were paid. If you put $10k into a tax deferred retirement plan, you would only pay taxes on $90K instead of $100K. The key thing to remember here however is that when you eventually take money from your retirement plan, 100% of your withdrawal will be taxed like a paycheck. 

Another nice thing is that depending on how your retirement plan is structured, as the employer, you can deduct any contributions to an employee’s retirement plan, even if it’s just your own! That said there are lots of different retirement plans out there, so it’s important to understand what plan is best for you and the rules that you have to follow in order to get the tax benefits I’m describing. 

I hear a lot about Traditional IRAs vs Roth IRAs. Is it correct that what you just described would fit under the labeled “Traditional” meaning that the account is tax deferred, whereas a Roth account means that the account is funded with after tax money?

That’s correct. The main difference when you’re using a Roth account is that you won’t get a tax deduction as an individual contributing to your Roth account. This means that you’re possibly going to pay more in taxes although you should consult with your CPA to confirm what account type is best for you. The huge advantage to a Roth account is that it will grow for decades depending on your age and when you eventually go to take money from it, you won’t have to pay any taxes on your account growth, at least that’s what’s current tax legislation says. 

In additional to the idea of a Roth vs a Traditional account, can you explain a little about the different types of retirement accounts?

 This is a great question although it’s unfortunately a little complicated so I’m going to keep it simple. I’m also going to give you a brief article that reviews these options that you can reference. You should consult with an advisor and your tax professional before moving forward with a plan since everyone is different and whether you have other employees, how much money you need to save, how old you are and many other factors can impact what plan is best for you. For example, someone with employees will have to plan not only for their retirement but also their employees in order to follow the law. This can be more expensive and more complicated. A very easy option for someone in this kind of scenario may be a SIMPLE IRA. This would allow each employee to individually save up to $12,500/ year and would also require an employer match of 2-3% of each employee’s salary. This kind of plan is easy to put in place and administer but as you can see you’re capped with how much can be put into it. 

If you want to be able to contribute more money to your plan, you could consider a 401(k) plan for your company, which is more complex and can be expensive, but allows each employee to save up to $18,000/ year. You will also likely have to contribute to your employees’ 401(k) plan or you’ll have to do testing in order to prove that you’re treating your employees fairly.

These reasons are why many companies stick with a Simple IRA. In the event you’re a sole proprietor and just want to save as much money as possible for retirement, consider implement a Solo or Individual 401(k) plan which allows you to still save up to $18,000 as an individual and make an additional employer contribution, a % of income after expenses. The Solo/ Individual K is easier than a regular 401(k) but definitely not as easy as a SIMPLE. 

If you’re not trying to save as much money as possible and just want to get something easy in place, you may want to consider a SEP IRA. A SEP IRA allows you to make an IRA contribution of $5,500/ year as an individual contribution and to save a % of business income after expenses. 

That said, if you have employees, you have to match them whatever employer amount you would be saving into your own account to avoid breaking rules that protect employees, which could be too costly. Generally, I would recommend the SEP IRA for a sole proprietor that’s trying to save but can’t max out their plan and if you have employees, I would steer you back in the direction of a SIMPLE IRA or 401(k) plan. 

Needless to say there are lots of things to think about and I really do think that it comes down to what you want to do. Make sure to prioritize what your first goal is- ie, is it to retain employees or is it to save for your own retirement? 

To wrap things up, could you also just explain when is a good time to start saving, any tips for saving and ways to stay motivated? 

This is such a good question Daniela, mainly because what I often see are people that think, “I can only save $50 or $100/ month, what’s the point?” The bottom line is that the sooner you start the better. Take a look at the following chart that shows someone saving $100/ mo from 21-41, then stops vs a person that saves the same amount from 47 -67. Assuming that money earns a return around 7%/ year the person that started in their 20s has around $400,000 more than the person that waited until their 40s to start saving! 

This may be a little depressing for anyone that’s in their 40s and behind which is not my intention at all! Unfortunately what you do need to do at this point is catch up and have a solid plan in place to get you where you want to be. One of the best ways to increase contributions as your business grows is to simply act like it hasn’t grown at all, i.e. continue to take your same salary, but put the difference into your retirement plan. Another good strategy is to start with doable number and just increase it each month by another $20 or $50. Most folks don’t miss it and they’re amazed at how much they accomplish over a few months. 

Thank you so much for being with us today! Is there anything else that you want to share? 

Daniela thanks again for having me. The last thing I want to mention is that as a small business owner you need to make sure you’re adequately insured. In addition to property & casualty insurance you need to think about what happens if you get sick and can’t work. Most people don’t realize that 1/8 workers entering the workforce today leave the workforce for 5 years or longer to recover from an injury or sickness. This could be something as common as back issues, cancer or heart issues. 

If you’re out of work for five years and don’t have someone else paying the bills, you will destroy all the hard work you’ve done to save for retirement, college or other goals! Pretty affordably you can get an individual disability insurance policy that will protect you from this risk and you can also get a business overhead disability insurance policy, which will pay your business expenses for one year while you can get figure out your next steps. Even if cash flow is tight, you can lower your benefit period and do other things to lower the premiums. I highly recommend both types of policies and I’m happy to help anyone that needs this kind of insurance, as well as help assessing what retirement plan is best for them or just generally help with their financial planning. 

Required Disclosures: 

Skyler Heimark, CFP®

Financial Advisor Raymond James | 1717 Pennsylvania Ave NW | Suite 1050 | Washington, DC 20006202-872-5908 Direct | 610-220-7966 Cell | 866-522-9587 Fax  

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