Your Retirement Plan Probably Has a Gap in It

Key Takeaways

• Inflation means the number you had in your head for retirement is probably outdated, and not in your favor
• Most business owners don't account for rising costs when calculating what they'll need. The gap between what they save and what they'll spend is larger than they think
• Health insurance in retirement is one of the biggest costs owners forget to plan for. A Health Savings Account (HSA) is one of the best tools available to start building that reserve now.
• A smart business exit takes years to set up. The owners who get the most out of it start early.

Most business owners have a rough number in their head and a vague plan to hit it. The numbers are usually wrong, and the plan usually doesn’t exist yet. But the version most owners are running right now was built for a different economy.

The assumptions that felt reasonable five or ten years ago - what the business might sell for, what a comfortable monthly draw looks like, what healthcare will cost - have all shifted. Inflation changes the math on every one of them, and most owners haven't updated their numbers.

Here's what needs to change.

Your Retirement Number Probably Needs Updating

Most owners have a number in their head. Two million. Three million. Something that sounds like enough. The problem is that number was probably based on what life costs today, not what it'll cost when you actually stop working.

At 3% annual inflation, an $80,000-a-year lifestyle today costs about $107,000 a decade from now. At 4%, it's over $118,000. The target you've been saving toward may already be too low, and every year you don't adjust it, the gap gets wider.

For self-employed owners, this shows up in two places. The retirement target needs to move with inflation, not stay fixed. And the accounts you're saving into need to actually grow — leaving money sitting in low-yield accounts doesn't work when costs are rising faster than the interest.

The accounts worth knowing:

SEP-IRA: you can contribute up to 25% of net self-employment income, with a maximum of $72,000 in 2026. Easy to set up, tax-deductible, and flexible enough that you can vary the amount year to year if your income isn't consistent. SEP-IRAs can be opened up to your tax filing deadline, including extensions.

Solo 401(k): up to $72,000 total in 2026, with an $8,000 catch-up contribution if you're over 50, bringing the total to $80,000. This is typically the highest-contribution option available to owner-only businesses. There's also a Roth version, where you contribute after-tax dollars but growth and withdrawals are tax-free. Worth considering if you expect tax rates to be higher later, which, given current trends, is a reasonable assumption.

SIMPLE IRA: if you have employees, this lets you contribute $16,500 as an employee with a required employer match. Lower ceiling than the Solo 401(k), but it's a workable option if you want to offer your team something without running a full 401(k) plan.

One thing to know on timing: Solo 401(k) plans have to be set up by December 31 of the year you want to use them.

The bigger point here isn't which account you pick. It's that contributions need to be treated like rent - a fixed expense that goes out every month regardless of how busy things are. The owners who fall short in retirement aren't usually the ones who picked the wrong account. They're the ones who kept pushing contributions to next quarter.

Health Insurance Will Cost More Than You Think

If you retire before Medicare at 65, you're buying private insurance. A couple in their late 50s can expect to pay $2,000 to $4,000 a month in premiums depending on where you live and what plan you're on. That's $24,000 to $48,000 a year before anything comes out of pocket. And in an inflationary environment, those premiums go up every year.

Medicare helps, but it doesn't cover everything. Dental, vision, hearing, and long-term care aren't included in standard Medicare. A nursing home stay or a few years of in-home care can run $100,000 or more per year in California. That's not a worst-case scenario, it's a common one that most people don't put into their retirement budget until it's already happening.

The tool that actually addresses this is the Health Savings Account, or HSA. To use one, you need to be on a High-Deductible Health Plan. In 2026, you can contribute $4,400 as an individual or $8,750 for a family, with an extra $1,000 catch-up if you're 55 or older.

What makes it worth paying attention to: contributions are tax-deductible, the money grows tax-free, and withdrawals for medical expenses are tax-free. That's three separate tax advantages on the same account. After 65, you can withdraw for anything, non-medical withdrawals get taxed as ordinary income, similar to a traditional IRA, but the money doesn't expire and there's no use-it-or-lose-it rule like with an FSA.

If you max out HSA contributions for the next 10 to 15 years, you're building a dedicated pool of money for the expense that's most likely to wreck a retirement budget. That's a straightforward move that most owners haven't made yet.

The Business Exit Is Its Own Conversation

The sale of your business is still part of the picture. For most owners, it's the biggest part. But it takes years to set up properly, and the difference between a prepared exit and an unprepared one is significant - often hundreds of thousands of dollars.

We've covered what a smart exit actually looks like in a separate post. The short version for now: buyers pay a multiple of your earnings, and that multiple goes up when the business doesn't depend entirely on you to run. Clean financials, documented processes, a team that can operate without you in the room, these things move the number. Starting to work on them five years out is realistic. Starting five months out usually isn't.

California also taxes the gain from a business sale as ordinary income. There's no preferential capital gains rate at the state level, so a large gain gets hit at up to 13.3% in state taxes alone, on top of federal. How the deal is structured from installment sale vs. lump sum, to asset sale vs. stock sale, can make a real difference in what you actually keep.

That's a conversation for your CPA and a transaction attorney, ideally well before you have a buyer at the table.

Putting It Together

Inflation impacts business owners slowly and in the background. The target stays the same while costs keep moving, the savings that felt like enough start to fall short, and the healthcare budget that wasn't in the plan at all becomes the biggest line item in the first few years.

The owners who land in a good spot aren't usually the ones who timed everything perfectly. They're the ones who treated retirement like a system, adjusted their targets for inflation, saved consistently into the right accounts, built a healthcare reserve early, and prepared the business to sell on their terms rather than under pressure.

None of it requires a perfect year. It just requires not leaving it until later.

Frequently Asked Questions

Can I contribute to both a SEP-IRA and a Solo 401(k) in the same year?

Generally no. Both plans apply to the same earned income and the IRS limits are applied across them. The Solo 401(k) is usually the better choice if you want to maximize what you're putting away, especially with the catch-up provision after 50.

What if I have employees? Can I still use a Solo 401(k)?

No. The Solo 401(k) is only available to businesses where the owner and their spouse are the only employees. If you have staff, a SIMPLE IRA or a traditional 401(k) are the more appropriate options.

Is an HSA worth it if I have ongoing health costs?

Usually yes. The tax advantage is significant enough that most owners come out ahead even with moderate annual expenses. If you have a chronic condition with predictable high costs, it's worth running the comparison before switching plans.

What happens to unused HSA funds?

They roll over every year with no expiration date. At 65, you can withdraw for any purpose, non-medical withdrawals are taxed as ordinary income, the same as a traditional IRA. The money doesn't disappear if you don't spend it.

How does California affect all of this?

More than most states. California taxes capital gains from a business sale as ordinary income, there's no lower rate for long-term gains the way there is federally. It also doesn't offer additional state-level deductions for IRA contributions beyond what the federal deduction already covers. Both of those make account selection and deal structure at exit more important here than they would be almost anywhere else.