06 Jun Forbes: 34% of Entrepreneurs Have No Retirement Savings Plan
Kate Ashford , Forbes CONTRIBUTOR
Fully a third of small business owners don’t have a retirement savings plan, according to a recent survey by small business site Manta. Of those who don’t, 37% don’t make enough profit to save for retirement, 21% used their previous retirement savings to invest in the business, and 18% plan to sell their business to fund their retirement.
“I find that small business owners, especially successful ones, are typically very driven and optimistic people,” says Kirk Licata, a financial advisor in Atlanta. “Oftentimes, they put blinders on to focus on their vision and may not have savings, succession or insurance plans in place along the way.”
Unfortunately, optimism won’t pay the bills in your retirement years, so it’s likely that small business owners could use some additional planning. Here are some strategies to help make the future more secure.
Start saving immediately. “I always recommend that entrepreneurs act as if they will never sell their business and plan accordingly,” says Ryan Fuchs, a financial advisor in Frisco, TX. “Set up a retirement account and save in it. There is no guarantee that they will be able to sell their business to fund their retirement. And even if they do, there is no guarantee that they will get enough to retire on, particularly after they account for taxes.”
Use the right retirement vehicle. If you’re a solo entrepreneur with no employees or only your spouse and making up to $250,000 a year, a solo 401(k) is your best bet. “You can get more into a solo 401(k) than a SEP,” says Lisa A.K. Kirchenbauer, a financial advisor in Arlington, VA. “So it’s great for tax and retirement planning.”
Don’t shoot your Social Security in the foot. “One mistake I see self-employed business owners making is trying to get their taxes down as close to zero as possible,” says Elizabeth Revenko, a financial advisor in Berkeley, CA. “If your reportable income for Social Security is very low year after year, come retirement time, you may be forgoing a significant portion of a Social Security income stream that you could have benefited from.”
Protect your assets. “I advise clients who are self-employed that they are now responsible for their own life and disability insurance and must get individual policies, since they don’t have an employer providing any benefits,” says Todd Youngdahl, a financial advisor in Falls Church, VA.
Don’t overestimate how much you’ll get in the end. “Although a business exit is often the largest financial windfall for entrepreneurs, it is important that entrepreneurs don’t count on that as their sole retirement plan,” says Sterling Neblett, a financial advisor in McLean, VA. “Many times, entrepreneurs believe their business is worth much more than the actual market value, so in our planning projections we typically make a very conservative valuation assumption.”
Have an exit plan. An additional 34% of small business owners also have no succession plan—but that can leave you scrambling at the end of your working days. “Business owners should start working on their succession plan ideally in their 50s, and at least five to 10 years before retirement,” says Tracy Sherwood, a financial advisor in Williamsville, NY. “You need time to mentor your key employees in your business, negotiate a viable plan and prepare yourself for life after the business.”
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