You lie awake at night crafting plans to improve your business finances and grow your company. But what about your personal finances? Too many small business owners haven’t planned for retirement — as the saying goes, when you fail to plan, you plan to fail. In a recent Manta survey, one-third of small business owners say they don’t have a retirement plan.
This may be because small business owners in general plan to wait until they’re over 65 to retire (42 percent of survey respondents). Just one in three plan to retire between the age of 55 and 65. In addition, 34 percent say that after they retire from their business, they’ll look for new job opportunities.
But even if small business owners are cheerfully willing to work into their old age, the results of the survey are sobering: 37 percent of those without a retirement plan say they don’t make enough money to save for retirement; 21 percent say they used up their retirement savings to invest in their businesses. In addition, 18 percent expect to fund their retirement by selling their business. While this is a common strategy, it’s not always a successful one — especially if your business relies on you being around to run it.
On a happier note, small business owners who do have retirement plans are using a diverse range of investment vehicles to plan for their futures. Here are the most popular types:
- Self-Employed 401(k) – 43 percent
- Traditional IRA – 31 percent
- Roth IRA – 29 percent
- Simple IRA – 13 percent
- SEP IRA – 10 percent
- Other – 26 percent
The misperception that retirement plans are too expensive keeps many small business owners from starting one, reports the Spark 401k Small Business Retirement Planning Index. Nearly six in 10 small business owners who don’t have 401(k) plans say it’s because their business is too small to start one. Sixteen percent believe the cost of a plan is too high, and 22 percent say they can’t afford to match employee contributions.
These misconceptions are hurting small business owners, according to Spark. Some 86 percent of small business owners who have 401(k)s feel secure that they are on track to saving enough money for retirement.
Starting a company retirement plan benefits more than just your personal bottom line, however. A whopping 94 percent of small business owners who offer 401(k)s to their employees say it helps them attract and recruit workers. Fifty-two percent say it attracts more qualified employees and 47 percent say it boosts employee engagement. In fact, 27 percent of those who offer 401(k)s say they started doing so partly in response to employee demand.
If you still think it costs too much to offer a retirement plan, consider this: In nearly half of small businesses with two to 50 employees, workers who quit cite a lack of retirement benefits as a reason. On average, business owners say, it costs more than one-quarter of a departing employee’s salary to replace him or her. What’s more, 35 percent of business owners with 401(k)s say the plans have helped them reduce their personal taxes, while 31 percent say the plans helped cut their business taxes.
Your business is never too small to offer a 401(k). Even one-person companies can do so by setting up owner-only plans. In addition, there’s no requirement to match employee contributions (although it’s a nice perk), so don’t let this stop you from setting up a retirement plan if that’s what’s holding you back.
Of course, a 401(k) is not your only option for setting up a company retirement plan. Your accountant can help you assess the benefits to your business and your personal finances of various investment vehicles, and choose the right option for you. The IRS website offers lots of guidance about how to choose a retirement plan for a small business.