As an owner of a small business, I appreciate all the pressures entrepreneurs are under. A recent article in Businessweek observes that the self-employed save very erratically. We have written recently that only 71% of Americans have a written Retirement Plan, and small-business owners are even worse. A survey published by TD Ameritrade points out that “most self-employed people aren’t saving enough for retirement (if they plan to save at all).”
Since 2001, there are more than 10 million Americans who have chosen self-employment, an increase of 14%. This trend has occurred for many reasons, the most prevalent being freedom, being their own boss, or a passion they are following.
“For entrepreneurs there needs to be a balance between investing in the business today and investing in their future financial well-being,” says Lule Demmissie, managing director of retirement at TD Ameritrade. “When you’re self-employed, the temptation is to think that the business will grow enough that you won’t need to save today.
“But, you don’t know when the next payout is coming and you also don’t want to forfeit the power of tax-free compounded growth in vehicles like an IRA,” she adds. “Having a retirement plan in place with regular saving is doubly important.”
The report notes only about 30 percent of people who save regularly have a retirement savings goal in mind. Among the self-employed, only 8 percent regularly have a fixed amount deducted from their paycheck. This compares with 53 percent among the traditionally employed.
Unfortunately the freedom small business owners seek in our economy is less likely to be achieved financially at retirement. An article this week in USA Today by Rodney Brooks points out “many of these budding entrepreneurs, and even the people who have owned their businesses for years, are part of a growing problem: They aren’t saving for retirement.”
At Financial Freedom Planners one of the first things we look at with our clients is a cash-flow analysis. This sets the financial goals based on all the input from the client, and becomes the framework to craft a solution or solutions. While a goal of selling their business can be part of a retirement plan, we caution placing too much emphasis on a future sale. As we all know things can change, and nothing beats methodical savings into some kind of retirement account. We have a customized planning process we call BUILDING A BRIGHTER FINANCIAL FUTURE™. In this process we can do “what if” analyses for the business owner, and come up with a strategy that works for them.
Fortunately there are many retirement plans to choose from to fit the needs and demands of small business owners. They look for plans that: fit their circumstances, are easy to set up, easy to make contributions to, are flexible, and can be done on a pre-tax basis. Some alternatives suggested in the above study are Simplified Employee Pension (SEP) IRA; Individual 401 (k); Savings Incentive Match Plan for Employees (SIMPLE) IRA; and Profit-Sharing Plans.
The key is to take action sooner rather than later, to allow the positive impacts of compounding, tax incentives and Dollar-Cost Averaging. We recommend anyone considering launching their own business to factor some kind of retirement savings, however modest, into their business plan. We call it “paying yourself first.”
We also recommend seeking out assistance from a CFP® professional in the Garrett Planning Network to assist you in developing a plan. Part of the DNA of an entrepreneur sometimes makes it difficult to ask for help, but we strongly encourage you to do so. We think you’ll be glad you did!