{"id":6066,"date":"2016-12-23T08:15:40","date_gmt":"2016-12-23T12:15:40","guid":{"rendered":"https:\/\/kerryhannon.com\/?p=6066"},"modified":"2016-12-23T08:15:40","modified_gmt":"2016-12-23T12:15:40","slug":"best-retirement-plans-for-small-business-owners","status":"publish","type":"post","link":"https:\/\/kerryhannon.com\/?p=6066","title":{"rendered":"Best Retirement Plans for Small Business Owners"},"content":{"rendered":"
\u00a0\"\"<\/a>My dad was a small business owner whose engineering and consulting firm provided a solid income for him and supported our family. When he realized none of his four children were going to take over the business, he sold it at age 70. Dad didn\u2019t have a retirement savings plan per se \u2014 the sale of the business was<\/em> his retirement plan (plus Social Security and some rental income).<\/header>\n
\n
\n

<\/h3>\n

Will Small Business Owners Face a Retirement Crisis?<\/h3>\n

Turns out, the way Dad approached retirement savings is pretty common for small business owners today. And that\u2019s more than a little troubling. According to a recent BMO Wealth Management survey <\/a>of 400 small business owners, only a fraction of America\u2019s entrepreneurs are prepared for retirement. (I\u2019ll offer retirement-planning advice for small business owners shortly.)<\/p>\n

A striking 75 percent of survey respondents age 18 to 64 have saved less than $100,000 for retirement. Those age 45 to 64 are only marginally more prepared: 32 percent have over $100,000 in retirement accounts and only 11 percent have more than $500,000.<\/p>\n

I was pleased, however, to see that 39 percent of business owners age 45 to 64 \u2014 the ones closing in on retirement \u2014had traditional IRAs or Roth IRAs and 29 percent were saving in 401(k)-type accounts.<\/p>\n

\n

Taking money out of a business impinges on growth prospects and it can make it hard to maintain the business.<\/p>\n

\u2014 David Deeds, University of St. Thomas<\/p>\n<\/blockquote>\n

Why don\u2019t more small business owners save for retirement?<\/p>\n

As with my father, \u201cthe business is<\/em> their retirement plan,\u201d says David Deeds<\/a>, the Schulze Professor of Entrepreneurship at the University of St. Thomas in Minneapolis. \u201cThe plan is that when they retire, they are either going to transfer the business to a family member in exchange for a share of future wealth or a buyout or they are going to sell it off and turn that into cash.\u201d<\/p>\n

Danger of a Common Approach<\/h3>\n

This all-your-eggs-in-one-basket approach can be dangerous for a variety of reasons, though.<\/p>\n

\"Deeds_225x200\"
Professor David Deeds<\/figcaption><\/figure>\n

\u201cThere is a risk level to it,\u201d says Deeds, who is also editor-in-chief of EIX,<\/a> the Entrepreneur & Innovation Exchange, a social-media learning platform designed to improve the success rate of new business ventures. \u201cIf the business fails, your wealth goes away.\u201d<\/p>\n

When business owners age 45 to 64 were asked by BMO Wealth Management what contingency plans they had if their business couldn\u2019t be sold or if the proceeds wouldn\u2019t be sufficient for their retirement, 28 percent said they\u2019d delay retirement.<\/p>\n

I hope their health holds out. When the Employee Benefit Research Institute surveyed retirees<\/a> earlier this year, 55 percent of those who retired earlier than they\u2019d planned did so due to health problems or disability.<\/p>\n

Read on Forbes<\/a><\/strong><\/p>\n

Why Entrepreneurs Aren\u2019t Saving Much<\/h3>\n

For small business owners, it\u2019s not that they don\u2019t want<\/em> to save for retirement outside of their businesses. Their priority is to plow earnings back into the business to keep it growing, so they rarely pay themselves a big salary.<\/p>\n

\u201cIf you are a small business owner, much of your wealth is trapped in your business. The problem is in order to diversify that wealth, you have to remove that wealth from the business, and, in essence, remove some of the lifeblood from the business,\u201d Deeds says. \u201cTaking money out impinges on growth prospects and it can make it hard to maintain the business.\u201d<\/p>\n

Another reason for the shortage of retirement savings could be that many businesses are fairly modest. When owners were asked the value of their business if it were sold today, 55 percent estimated less than $500,000. Only 13 percent believed their businesses were worth more than $1 million.<\/p>\n

Dave Bensema, regional leader of planning, Illinois at BMO Wealth Management, says entrepreneurs need to take time away from working in<\/em> the business spend more time working on<\/em> the business. \u201cA key question for business owners, whether from a retirement perspective, a potential sale, or even the continued operation of a business is \u201cDoes the business run without me?,\u201d says Bensema. If the answer is No, there could be difficulties valuing the business, finding a buyer or even generating income from it when you\u2019ve left or are less active in it, he notes. \u201cOnce you know what income might be, then you can back into how much you need to save,\u201d adds Bensema.<\/p>\n

5 Retirement Savings Tips for Small Business Owners<\/h3>\n

Here are five ways small business owners can ramp up their savings for retirement:<\/p>\n

1. Run your numbers<\/strong>. Ask yourself: How much will I need to live on in retirement, especially when the business isn\u2019t picking up the tab for some expenses? Just getting a sense of what your living costs might be when you quit working could be the retirement-savings wake-up call you need. Most major financial services firms such as Fidelity, T. Rowe Price, TIAA and Vanguard offer fee online retirement worksheets and calculators to help you get a bead on future expenses.<\/p>\n

2. Consider hiring a financial adviser <\/a>to jump start your retirement plan and help you focus.<\/strong> I recommend one with the Certified Financial Planner (CFP) designation. A few searchable databases: the National Association of Personal Financial Advisors, The Garrett Planning Network, the Financial Planning Association and the Certified Financial Planner Board of Standards.<\/p>\n

3. Start a diversified retirement plan.<\/strong> You don\u2019t have to throw a gob of money into it, but the funds will help trim your tax bill now and grow tax-deferred until you make withdrawals in retirement. In most cases, the cost of opening and administering a plan is pretty small. The 401khelpcenter.com site<\/a> has a free directory of firms that sell retirement plans to small business owners.<\/p>\n

The four main options: a SEP-IRA<\/a>, a SIMPLE IRA<\/a>, a Solo 401(k)<\/a> and a SIMPLE 401<\/a>(k). For all but SEP-IRAs, a business can be a sole proprietorship, a partnership, a limited liability company or a corporation.<\/p>\n

A SEP-IRA<\/a> is a tax-deductible retirement plan like a traditional IRA and great if you\u2019re the company\u2019s only employee (as I am). For 2016 tax returns, you can contribute up to 25 percent of your compensation or $53,000. One caveat: If you have employees, you generally must also fund SEP-IRAs for them.<\/p>\n

A SIMPLE IRA<\/a> is a retirement plan for owners with 100 or fewer employees. Contributions are pre-tax and taken directly out of employee paychecks, similar to a 401(k). Your contribution can\u2019t exceed $12,500 in 2016, $15,500 if you\u2019re 50 or older.<\/p>\n

A Solo 401(k)<\/a> is for self-employed people without employees (except perhaps a spouse). The IRS lets you contribute this year, pre-tax, up to 25 percent of your compensation plus an employee\u2019s contribution of up to $18,000 (or $24,000, if you\u2019re 50 or older). But your total contribution can\u2019t exceed $53,000. If your spouse works with you, she or he can also put in the same amounts.<\/p>\n

A SIMPLE 401<\/a>(k) is for businesses with 100 or fewer employees. You and your employees may contribute up to $12,500 for 2016; $15,500 for people 50 and older. You and your employees can borrow against the money in your 401(k) accounts and make penalty-free withdrawals due to financial hardship.<\/p>\n

4. Keep it simple<\/strong>. When investing, go for a globally diverse mix of low-cost index funds<\/a> (or ETFs<\/a>). You might buy three funds: an index fund that invests in the entire U.S. stock market; one that owns developed foreign stock markets and a smattering of emerging stock markets and an index fund that owns the broad U.S. bond market.<\/p>\n

Simpler still: invest in a target-date fund that automatically adjusts the balance of your fixed-income (bond) investments and stocks based on your age. Select your target-date fund based on the year you expect to retire. The biggest target-date fund families are Fidelity, T. Rowe Price, and Vanguard, though most financial institutions offer them, too.<\/p>\n

5. Check out 401 (k) plans targeted to small businesses.<\/strong> Some 401(k) providers are actively targeting small businesses these days. In August, Capital One, for example, launched Spark 401k<\/a>, providing low-cost, all-ETF 401(k) plans for businesses with fewer than 100 employees. It offers access to retirement planning experts, too.<\/p>\n

According to Capital One\u2019s research, 60 percent of small business owners don\u2019t think they have enough employees to offer a plan, which is a prevalent misperception, says Stuart Robertson, president of Capital One Advisors 401k services. \u201cThe truth of the matter is any size business, even an owner-only business, can have a 401(k) plan.\u201d<\/p>\n