Small business owners are among the Americans most likely to default on saving for retirement. Business reinvestment is often a priority for entrepreneurs who have any more cash than investing in a long-term tax-deferred retirement plan. Covid did not help.
Amid the pandemic, dozens of small business owners in America have halted or curtailed their retirement savings, according to investment professionals and retirement experts, squeezed by rising labor and raw material costs, or in the worst case scenario, facing business shutdowns.
The pandemic certainly hasn’t negatively affected every small business in terms of retirement planning. 37 percent of small business owners say they aren’t confident they’re saving enough for retirement, according to a March ShareBuilder 401k survey of 500 small businesses. But this is somewhat lower than the 44% who said two years ago they were not confident in their ability to save for retirement.
Some data shows that, at least on the margins, small business owners’ savings rates have reversed the bulge in all Americans during the pandemic. In 2019, the average monthly amount that active participants contributed to their 401(k) plan with Guideline, a retirement platform for small businesses, was $646. That rose to $783 in 2021, according to the company. Vanguard, for its part, has seen participation rates among small businesses rise to 73% in 2020 from 72% the previous year, and deferral rates — the portion of employee wages that contributed to retirement — climb to 7.3% in 2020, up from 7.1% in 2019.
But these findings generally do not reflect the experiences of many of the country’s small businesses – including those in the industries that are particularly hard-hit. Many of these companies have fallen further behind in their retirement savings goals in recent years for a variety of reasons and need a head start, according to financial professionals. Combined with the fact that many owners never save for retirement, recent market volatility can make it a good time to consider making money, or more money, for retirement.
Here are some ideas on how to bridge the gap.
1. Put at least 10% of your income into retirement if you can
In general, investment experts suggest saving 10% to 15% of your earnings annually over 40 years of business — just to maintain the same standard of living in retirement, said Stewart Robertson, CEO of ShareBuilder 401k. However, the March survey found that only 38% of companies surveyed were saving 10% or more. Meanwhile, 24% said they are not currently contributing.
2. Shrink the budget and redirect to savings
David Peters, founder and owner of Peters Tax Preparation & Consulting in Richmond, Virginia, asks business owners to take a close look at their budget, pay close attention to where they spend their money and look for ways to cut. For example, they may be able to work at home and save gas or cut out unnecessary luxuries. “The smart move would be to cut some of your current expenditures so you can continue to save for long-term goals,” he said.
3. Increased portfolio risk
Another option, for those who are already saving, could be to take on more investment risk, while also cutting back on spending, as appropriate. “If you increase your allocation so that you get two or three percentage points higher on the rate of return, and you reduce your spending by 2% to 3%, and you add the power of multiplier, it can be very powerful for the returns,” said Timothy Speiss, Tax Partner at Personal Wealth Advisors Group at EisnerAmper LLP in New York.
This may seem like a hard pill to swallow amid the recent market volatility, but for small business owners who have cash right now, they may be able to tap into some potentially undervalued cash. “People are afraid to save when they see the red numbers coming up every day,” Peters said, but because of market volatility, “there may be opportunities they wouldn’t have otherwise.”
As Dan Weiner, who runs an independent advisor to Vanguard Investors, recently told CNBC’s Bob Pisani, when the S&P 500 drops more than 3.5% in one day or series of days, they often don’t buy opportunities. Between June 1983 and the end of March 2022, this happened 65 times and produced average returns of 25.6% over the following year. “Buying with these big one-day drops in price has often been profitable if you’re willing to look forward to just one year,” he said.
4. Make a plan and stick to it
While some small business owners may worry that the market will decline further, retirement savings specialists said things tend to recover over time when owners regularly contribute to their retirement. The primary motivation should not be choosing the best days, but creating a plan for long-term savings and sticking to it.
By contributing regularly, investors get the dollar cost benefits, which means you don’t always buy high or low, said Kevin Bosky, CEO and co-founder of Guideline. “When you set it up and forget it, you don’t have to worry about market timing.”
Robertson provides an example of an investor who constantly buys a $500 fund, during a high market, a low market, and a recovering market. First, the investor buys five shares at $100 each. He then bought 10 shares at $50 each and eventually bought 6.67 shares at $75 each. His total expenses are about $1,500, and the average fund share price is $75. However, the total market capitalization of his 21.67 shares is $1,625.25, so he is ahead even though he has bought some shares at the highest in the market and some at the lowest in the market.
“They can save any way they want to; the important thing is that they do it,” Robertson said.