The U.S. Small Business Administration warns that too many small-business owners today lack sufficient retirement savings. In fact, wage-earning or hourly employees are more likely to be well-prepared for retirement than entrepreneurs. What’s worse, entrepreneurs’ inadequate savings can’t reasonably be attributed to the economic slowdown. They just don’t seem to think about retirement.
According to Winslow Sargeant, the SBA’s chief counsel for advocacy, a pair of studies suggest that the federal government needs to reset its policies and incentives to encourage more small-business owners to prepare for their futures.
One study, conducted by economist Jules Lichtenstein, examined data from the Census Bureau’s 2008 “Survey of Income and Program Participation.” (This data reflects the retirement assets held in individual accounts by both self-employed people and hourly employees over the age of 15.) Lichtenstein’s study found that small-business owners are significantly less likely to hold retirement assets (IRA and Keogh accounts as well as 401(k) and Thrift accounts) than private sector wage and salary workers, controlling for firm size and other factors.
Another study conducted by Economist Tami Gurley-Calvez, Research Assistant Professor at the Bureau of Business & Economic Research, and sponsored by the SBA, focused on people nearing retirement age. It found that small-business owners older than 50 are much less likely than wage and hourly employees of the same ages to have pension or retirement plans.
This was true even after researchers controlled for the number of years the individual owned his or her business.
What’s more, small-business owners expect to work longer and retire later (at an average age of 72.6) than private sector wage and hourly employees (who expect to retire at 68.4 years old). Even worse, older small-business owners tend to think about retirement less often than do comparable wage and hourly private sector workers.
However, small-business owners who do have retirement accounts (IRAs or Keogh plans) tend to be better prepared for retirement than people of the same age who aren’t small business owners or self-employed.
Do You Have Enough to Retire?
Of course, studies produce conclusions only about groups and statistical tendencies. To figure out whether you personally have enough money set aside for retirement, consider the following math problem
- Total your annual contributions to your retirement funds.
- Multiply that total by the number of years left until you retire.
- Add that product to your current retirement savings to calculate your expected assets for retirement at the time you retire.
- Subtract your age at retirement from your “expected life span” (find it here) to calculate the number of years you can expect to live after retirement.
- Divide your expected assets for retirement by the years you can expect to live after retirement to calculate your average annual asset drawdown during retirement.
- Add any other sources of guaranteed income, such as Social Security or pensions, to your average annual asset drawdown to calculate your annual income during retirement.
(Consider factoring in the expected annual growth of your current retirement savings and the anticipated inflation rate during the rest of your life expectancy, too.)
Once you’ve done the math, ask yourself: Is your annual income during retirement enough to support your desired retirement lifestyle?
What If You Don’t Have Enough?
Few of us have enough saved for the retirement lifestyle we hope to maintain. If you’re one of the many small-business owners who anticipates a financial shortfall ahead, you have only three real choices to change your situation:
- Earn more now, so you can put a larger chunk of change into your retirement savings.
- Spend less now, so you can put a larger portion of your current income into your retirement savings.
- Better manage your retirement savings to increase its rate of growth until you spend it.