Is Your Retirement Planned Out When the Business Closes?

For many small business owners hoping to finish the current month with a positive cash balance, planning for the retirement years often gets short shrift.

With so many immediate demands for his or her attention, it’s hardly surprising that he or she devotes little or no time to thinking about what seems to them the distant future.

In “Saving for Retirement: A Look at Small Business Owners,” Jules H. Lichtenstein of the Small Business Administration’s Office of Advocacy takes a close look at the retirement savings behavior of America’s small business owners.

What he finds raises concerns about the lack of business owners’ preparedness for their so-called golden years.

shutterstock_84923398Census Bureau Survey

Lichtenstein relies on data from the U.S. Census Bureau’s 2006 Survey of Income and Program Participation, which focused on the retirement savings plan participation of 4,922 business owners, a nationally representative sampling of small business owners across the United States. Of those surveyed, 91 percent owned businesses with less than 10 employees.

The Census Bureau survey found that 36 percent of the business owners had an Individual Retirement Account (IRA), but roughly two-thirds of those had not actively contributed to the IRA in the current tax year.

Keogh and 401k

Ownership of the other two primary retirement savings vehicles — Keogh and 401k — was even lower. Less than 2 percent of the business owners surveyed had a Keogh plan, and only 18 percent were participating in a 401k savings plan.

Another study produced by the SBA’s Office of Advocacy focused primarily on small business owners over the age of 50.

It found that most small business owners predicted they would retire on average at age 72.6, compared with an average of age 68.4 for most employees.

Reasons Unclear

Whether that later anticipated retirement date represents a lack of financial preparedness for retirement or a passion for their business isn’t clear, but the study did find that older small business owners tend to think about retirement less frequently than employees.

Business owners looking for some guidance about how to build a retirement plan may find that automated planning tools can simplify and expedite the process for them, especially given some may be too busy or not up to speed on all the financial options out there.

Gets Low Priority

Alyssa Gregory, About.com’s expert on the issues confronting small business, points out that in many cases, small business owners have left full-time jobs that provide retirement benefits. And in getting their businesses off the ground, retirement planning is not high on their priority list.

Gregory suggests that business owners seek out the professional counsel of their small business accountant or a financial planner in an attempt to decide the best way to start saving for retirement.

Carrie Schwab-Pomerantz, a regular columnist at Schwab.com, in early 2014 offered an excellent review of the retirement savings options available to small business owners.

In addition to writing her weekly column, Schwab-Pomerantz is president of the Charles Schwab Foundation, a nonprofit organization that is dedicated to the creation “of positive change through financial education, philanthropy, and volunteerism.”

SEP-IRA

Schwab-Pomerantz says the SEP-IRA (Simplified Employee Pension-Individual Retirement Account) is an excellent choice in that it allows a high level of savings with only minimal paperwork.

Although an SEP-IRA works for business owners whether or not they have employees, the plan is particularly beneficial for sole proprietors because it allows contributions as high as 20 percent of net self-employment income up to a maximum of $52,000 for 2014.

Individual 401k Plans

For business owners who have no employees apart from their spouse, Schwab-Pomerantz gives high marks to Individual 401k or Individual Roth 401k, which allows even higher contributions that a SEP-IRA but also calls for more extensive paperwork.

SIMPLE-IRA

Owners of businesses with 100 or fewer employees might find the SIMPLE-IRA (Savings Incentive Match for Employees) a good choice for employers who want to provide a retirement savings plan for their workers — and themselves — but keep their contributions to employee plans to a minimum.

One of the drawbacks to this plan is the limit on contributions to the employer’s own plan, which for 2012 is $12,000. If you’re over 50, you’re allowed to make an additional $2,500 catch-up contribution each year.

Regular IRA

Finally, there’s the regular IRA.

Of this option, Schwab-Pomerantz says, “The good news is if that you can contribute to both a small business retirement plan and a regular IRA and potentially get a tax deduction for each, depending on your income.

No matter which option works best for you, keep in mind that you’re also in business to have a comfortable retirement.

About the Author: Don Amerman is a freelance author who writes extensively about a wide array of business and personal finance topics.