Will Your Retirement be a Pain or Pleasure? A Strategy for Success
Editor’s Note: This post is sponsored by Capital One Spark. All the comments and opinions are my own.
All small business owners plan to exit someday, but the most recent figures I’ve seen say that 72 percent don’t have a real plan in place that can make that happen…at least not without having to substantially downgrade their personal lifestyle.
There’s another dimension in this problem: Only 32 percent of the workers in our nation’s smallest companies have any savings plan. Further, according to the recent Capital One’s Spark Business Barometer survey, the percentage of small businesses that offer 401(k) plans to their employees has dropped almost 50 percent since Q4 2014 – from 24 to 13 percent.
Let’s look at this from two points of view. First, for the small business owners and employees of small businesses, failing to plan for retirement will result in all kinds of financial and personal problems. Money will be stretched thin to the breaking point when they try to scrape by on social security plus any meager savings. Assets will have to be sold. Dreams of relaxing and traveling during retirement will go out the window.
Second, a huge group of unprepared retirees will be hitting the social security rolls at a time when there will be fewer and fewer wage earners paying into the Social Security Trust fund. Who knows how that drama will play out? However, it’s a safe bet that one way or another, social security benefits will be decreased.
What is sad about this situation is the fact that small business is the economic engine that has always driven our nation’s prosperity, but the owners and workers in that segment of the economy are among the least fortunate when retirement years arrive.
I mentioned 401(k) plans above and they probably embody the best strategy for overcoming all of the hurdles small business owners face in providing an adequate retirement for themselves, as well as for their employees. There are other sanctioned retirement accounts worth considering, but they often don’t work out as well for the small business owner:
Simple IRA. These accounts have lower contribution limits than the 401(k) and any money you put into a Simple IRA counts against any 401(k) contributions you make in a given tax year. This impacts small business owners who have a side job that comes with a 401(k).
SEP IRA. SEP stands for Simplified Employee Pension. A SEP IRA covers all of your employees as well as yourself. All contributions come from the small business owner; employees do not contribute. Also, everyone in your SEP IRA gets the same contribution each year, so whatever you give yourself, everyone gets.
Because 401(k) plans have been around a long time, there are many good options for you and they can be very “user friendly.” You want to find plans that are easy to set up and manage, and have very low operating expenses. Those seem to be the selling points for Capital One’s ShareBuilder 401(k). According to its figures, getting started with a ShareBuilder 401(k) will cost some 35 to 40 percent less for employers starting their first 401(k), compared to a 401(k) from a traditional provider. Also, virtually the entire process can be “paperless” and completed online in about 20 minutes. ShareBuilder 401(k) will waive set-up costs for all new 401(k) plans established between now and May 15, as part of Capital One’s Seize the May promotions.
There has been a lot of press lately about new regulations coming out of the Obama administration that could make it more difficult for small business owners to get investment advice. The regulations will hit financial advisors who make their money through commissions on the sale of securities. We don’t yet know the net impact on the market, but some smaller operations in the business of setting up 401(k) accounts will certainly need to make some structural changes.
Finally, as I implied at the top: If you plan to retire, you must have a retirement plan! If you’re coming late to the game, you need to be making maximum contributions, and fortunately once you hit the age of 50, your yearly contribution limits are increased. If you’re younger, time is on your side if don’t let another day go by without having a working plan in place.