The entrepreneurs I know vary in character. Some are dominant while others are steady. They almost always are DOERS. But when it comes to retirement preparedness, they don’t “DO”.
Being an entrepreneur myself, and knowing tons of entrepreneurs through the Entrepreneurs Organization, I find that the doers, the prepared ones in their respective businesses, are not prepared for retirement.
Most entrepreneurs can’t think of retirement, not in the normal sense of getting to the age of 65 and quitting work cold turkey. Most self-employed people see themselves continuing to work even they’re well past the age of 65.
Entrepreneurs are known for identifying, starting and organizing the required resources to take risks and rewards of business ownership. But they just don’t put the first foot forward when it comes to retirement planning.
Research done by Dushi, Iams, and Lichtenstein 2011 found that business owners have low rates of retirement account ownerships and contributions. Further, in a research paper authored by Tami Gurley-Calvez, Kandice Kapinos, and Donald Bruce and published by the Small Business Administration – Office of Advocacy, it was found that “the self-employed are significantly less likely to have an employer-provided pension (including basic pension or retirement plans and 401(k)s”.
While entrepreneurs have greater knowledge of financial concepts, they just have not put a plan into place.
Recently, I worked with an Entrepreneur, a woman who owned a software company. Overall, 86% of her wealth was in owning the company that she had started. She had a SIMPLE IRA account, but it held very little in it. In some way, this individual was more financially literate than other individuals. On the other hand, she lacked knowledge about basic personal finance that most people should know.
Success for business owners often breads neglect for their retirement. They either enjoy the fruits of their labor immediately, thinking that the cash flow from the business will support them, or they believe that they can sell the business and the proceeds will provide retirement income.
This one nest egg in the form of a business may be the right way to go, but it requires that you also build its wealth. Being intentional about having a system and procedures in place to prepare for a succession is a great step forward to building the value of the business, but it should not be the only piece to the retirement plan.
Overall, I am a believer in having a plan. It does not have to be anything long, just one page. I also recommend individuals create a personal balance sheet to track their wealth on an annual basis. In a plan, I think the second step must be to pay yourself first. Some Entrepreneurs pay themselves first very well, but this money will be long gone before you know it. Some of the initial money you pay yourself with should go into a long-term plan for retirement.
Those entrepreneurs that create a one page plan for their businesses are better prepared and will more likely succeed. If your retirement is so important, isn’t it wise to create a one-page plan for retirement as well?
By James Cornehlsen, CFA
Keywords: Retirement, Self-Employed