Friday, July 30, 2010

Living on the Edge: Small Business Owners and Retirement

Do you feel comfortable with your retirement plan?  If you’re a small business owner the answer to that question is probably no.  In fact, according to this report by Jules H. Lichtenstein, Office of Advocacy, US Small Business Administration, “Retirement account ownership, contribution, and participation rates for all business owners are low” and that “Having a micro-business with fewer than 10 employees reduces the probability of an owner having a 401(k)/Thrift plan from 17.4 percent to 10 percent!”

This is a concerning statistic.  Why is it that so many small business owners skimp on their own retirement?  It can’t be lack of knowledge, because most of them have enough financial savvy to keep their businesses doing well.  And it isn’t likely that the reason is lack of awareness, as most small business owners are well aware of the need for a substantial plan for the future.

Perhaps the reason is that small business owners feel the best investment in their future is to invest in themselves.  Where an employee in a large corporation is likely to take any investment income and put it in stocks or savings, a small business owner is more likely to turn around and put that money back into growing her own company. Perhaps small business owners feel that they have limited options when it comes to retirement—after all, they don’t have a large corporation offering to match their retirement contribution.  However, according to this article in the Motley Fool, small business owners actually may have more options than employees in large corporations.

“Several retirement plan options exist for small-business owners. They vary in how much money can be contributed, whether employees other than the owners may participate, what (if any) contributions the employer must make on behalf of employees, what deadlines there are for creating and putting money into the plan, and how hard it is to run the plan. Among the options small businesses commonly use are SIMPLE IRAs, SEP IRAs, profit-sharing plans, SIMPLE 401(k) plans, and single-participant 401(k) plans.”

So… are small business owners unaware of their many options for retirement planning, or are they merely more willing to live on the edge?