Small Business Owners Not Saving for Retirement
I wrote a blog not too long ago about how much we need to be saving for retirement. It turns out that small business owners are among those most at risk. A recent AP report posted by MarketWatch shared the stories of a number of business owners who simply ignored their own future and focused almost entirely on developing their businesses. Many viewed their companies as their nest eggs, planning to sell them some day to fund their retirement. Is this a wise strategy?
Kari Warburg Block didn’t even think about saving for retirement until she was unable to get a loan for her fourth business in 2003, three years after she started the company. Her banker wanted to see her personal finances, believing that people who handle their savings and investments well will also do a good job running their companies and be a good credit risk. Block had never taken money for her retirement out of the companies she had previously owned. As a result, the banker denied the loan, and Block found herself not only without any retirement savings but with a business with future prospects now constrained.
She’s not alone. Of small business owners surveyed by American Express, 73% said they’re worried about their ability to save for the lifestyle they want in retirement. Saving for retirement often takes a backseat to building their company. A study by the Small Business Administration found that only about a third of owners had individual retirement accounts or made contributions to them in 2006, and only 18% had a 401(k). By comparison, nearly two-thirds of all families had some sort of retirement savings, either from an employer or their own IRA in 2007, according to the Employee Benefit Research Institute.
I have personally known many Silicon Valley entrepreneurs over the years. One of the things I’ve learned is what sets apart the successful ones from the unsuccessful ones. It’s not, as you might surmise, having a great idea or being especially talented or even being in the right place at the right time. The key success factor was knowing how much they could afford to lose before making the decision to invest in a new business.
That may sound trivial, but it assuredly is not. I’ve found that entrepreneurs who were able to identify and stick to their limits were the ones who were able to successfully ride out the downturns. Not that they were better at saving their businesses when things got tough. In many cases they allowed their businesses to go under. But they were better diversified. When a business failed they maintained at least a separate safety net to support themselves and their families while planning their next business.
Small business owners are naturally sanguine about the prospects for their businesses. Michael Maher, co-owner of Taylor Stitch, a four-year-old clothing retailer based in San Francisco, is using his own savings to start and build the company. “We’re plowing all our money back into the company for the most part and taking a nominal salary,” he says. And he believes that a company he runs is a better investment than the stock market. “I am investing money in a business that I think is viable and that I control instead of investing in something that I don’t control,” he says. But there are many factors beyond a business owner’s control. Take 2008. The plunge in lending to small businesses, together with the slowdown in both business and consumer spending, forced many owners to liquidate personal assets like bank accounts, stocks, and mutual funds to keep their companies afloat. When you concentrate most of your assets into a single investment such as your business, you can easily be left with nothing if it should collapse.
How can you figure out how much you can afford to lose in a startup business? That part’s easy. It’s all about planning for your future. For more details, see the blog I wrote on this topic a few months ago: Ready to Start Financial Planning? Where to Begin?