Small business owners neglect retirement savings

Money Watch has an article that reviews one of the biggest financial mistakes made by business owners: failure to put money aside outside of their business.  Business owners seem to view their business not only as the source of their current income but also the source of their retirement income, and that is frequently a costly mistake.

For many small business owners, the golden years aren’t looking so shiny. Many have devoted so much time and money to their businesses that they have failed to plan for retirement. Catch-up plans for these owners usually consist of aggressively putting money aside, or taking another big risk: planning to sell their companies one day to fund their retirement.

[Kari Warberg] Block, 50, who has owned four companies over the years, didn’t start saving for retirement until she was unable to get a loan for Earth-Kind in 2003, three years after she started the company, based in Bismarck, N.D. Her bank asked for a statement showing her personal financial holdings, including savings and investments. She had only an annuity she had purchased when she was 18, and a family inheritance. She had never taken money for her retirement out of the companies she had previously owned, which included bookkeeping and delivery services.

“I looked at the personal finance statement and realized there’s nothing here,” Block says. Bankers want to see an owner’s personal finances because they believe that people who handle their savings and investments well will also do a good job running their companies and be a good credit risk.

 60% of small business owners surveyed by American Express say they are not prepared financially for retirement and 73% said they’re worried about their ability to save for the lifestyle they want in retirement.

Of course a financial downturn, competition or changes in demand can all work to make it impossible for owners to save or even maintain their business.  The recent economic downturn has forced many business owners to use personal assets to keep their companies running.  Some have cut or even eliminated their own salaries to keep their companies afloat.  A survey of small business owners by Pepperdine University and Dun & Bradstreet Credibility Corp. found that 42 percent had used personal assets to fund their companies in the first quarter of the year and nearly 80 percent of those owners dipped into their savings or investments. A year earlier, 46 percent used personal assets, and 68 percent turned to savings and investments.

Businesses in the housing and construction industry were particularly hard-hit.  In some cases a business that may have been valued at millions during the housing boom is worthless.   The owner, unless he has created a nest-egg outside of his business, is penniless.  Most business owners don’t recognize the risk they are taking or are too busy running tier business to prepare their personal financial safety net.  That’s where a good independent RIA (registered Investment Advisor) able to create a comprehensive investment, tax, insurance and estate plan can be worth his weight in gold.

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