By: Rodney Brooks
December 17, 2013
Many of us have dreams of leaving the 9-to-5 grind and working for ourselves. And since the 2008 financial crisis, many have done it -- even if some didn't really have a choice.
But 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.
TD Ameritrade's Self-Employment and Retirement Survey found that 40% of the self-employed are not saving regularly for retirement, and 28% are not saving at all. The problem plagued all age groups: 29% of Generation X and 32% of Generation Y who were self-employed are not saving for retirement.
Also, 83% of self-employed who said they are saving for retirement said that at some point they needed to stop or cut back on their savings due to various obstacles.
"I think it's a huge problem," says Michael Piershale, president of Piershale Financial Group in Crystal Lake, Ill. Most small-business owners aren't knowledgeable about retirement, because they focus on their business at the expense of everything else, he says. "For the first few years, it's nip and tuck. They are human resources, the accounting department, marketing department, IT department."
But entrepreneurs need to 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," Demmissie says. "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. Having a retirement plan in place with regular saving is doubly important."
Lynn Mayabb, managing director of BKD Wealth Advisors in Kansas City, Mo., said saving for retirement is an issue for the self-employed because many don't realize that there are retirement plans available to them. "We let them know they can set up their own individual 401(K) or SEP IRA. There are many types of plans they can use to defer income."
Piershale agrees. He says when he sits down with clients who own their own businesses, many are not aware of their options or the tax benefits of retirement accounts.
"Often they invest all their profit back in their business," he says. "They look at it as an alternative to a company retirement plan that might be invested in stocks or bonds. But the big danger is if your business s goes under, you would have only Social Security."
He says the first thing he does for his clients is run a retirement cash flow analysis on financial planning software. That will determine how much money they will need for retirement to live the kind of lifestyle they want. And if they plan on funding their retirement with the sale of their business, he often cautions them.
"In the best-case scenario I tell them to assume no more than half of their income will come from their business," he says. "Then we run a conservative calculation. I always tell them your business is your highest-risk asset. A lot of times familiarity breeds overconfidence."
Some advice for entrepreneurs who need to either get started or catch up on their retirement savings plans.
1. "First thing is to find a way to save systematically," says Patrick Strubbe, founder of Preservation Specialists in Columbia, S.C. and author of Save Your Retirement. "Most employees have 401(k)s. The self-employed don't have that. We encourage them to do some kind of automatic deduction into some type of savings plan."
2. Get help if you need it, says Lena Haas, senior vice president for long-term investing and retirement at E-Trade Financial. "Fortunately, most self-employed retirement plans are easy to start up, inexpensive to run, and simple to manage. Take advantage of the support tools and services available to help narrow down your options and select the plan that best meets your needs."
3. Figure out what type of plan works best for you, says Haas. "Review your business situation and the amount you can contribute each month to determine the right type of plan that meets your circumstance," says Haas. "Some plans offer loan features, so there are options available to get funds if you have a setback. And consider the increased contribution amounts, or 'catch-ups' if you are age 50 or older, which are available in several retirement plans today."
4. Reduce debt. "A lot of our clients have aspired to bigger and more expensive lifestyles as they get closer to retirement, says Strubbe. "They need to realize it's time to tighten that up. A lot of our clients start downsizing their homes. It could take a big burden of income needs in retirement."
"Sometimes it's hard," says Strubbe. "Some of the self-employed are scraping to make it by every day. Some think if they haven't saved a million dollars, a planner isn't going to make time for them. But everyone needs the opportunity to get some advice."