Small business owners are among the Americans most likely to fall behind when it comes to saving for retirement. Reinvesting in a business is more often a priority for entrepreneurs with excess cash than investing in a long-term tax-advantaged retirement plan. Covid didn’t help.
Amid the pandemic, scores of American small business owners have suspended or cut their retirement plans, according to investment experts and pension experts, who have been pressured by rising labor and commodity costs or, in the worst case, faced business closures.
Certainly, the pandemic hasn’t impacted every small business when it comes to retirement planning. According to a ShareBuilder 401,000 survey of 500 small businesses, 37% of small business owners say they’re not sure they’re saving enough for retirement. But that’s slightly less than the 44% who said they had no confidence in their retirement savings two years earlier.
Some data show that small business owner savings rates at least marginally reflected the rise of all Americans during the pandemic. In 2019, the average monthly amount that active participants contributed to their 401(k) plan with Guideline, a small business retirement platform, was $646. According to the company, this rose to $783 in 2021. For its part, Vanguard saw small business ownership rates increase from 72% to 73% in 2020, and deferral rates — the portion of salary going into retirement — increased to 7.3% in 2020 from 7.1% in 2020 2019
But those results don’t generally reflect the experiences of many of the country’s smallest companies — including those in hard-hit industries. Many of these companies have fallen further behind on their retirement goals in recent years for a variety of reasons and need a kickstart, according to financial experts. Coupled with the fact that many owners have never saved for retirement, the recent market turmoil could make it a good time to start thinking about saving money, or more money, for retirement.
Here are a few ideas on how to bridge the gap.
1. If possible, put at least 10% of your income into retirement
In general, investment experts suggest saving 10% to 15% of your income annually over a 40-year career — just to maintain the same standard of living in retirement, said Stuart Robertson, CEO of ShareBuilder 401k. However, the March survey found that only 38% of the companies surveyed are saving 10% or more. Meanwhile, 24% said they don’t currently contribute.
2. Reduce the budget and redirect it to savings
David Peters, founder and owner of Peters Tax Preparation & Consulting in Richmond, Virginia, has advised business owners to carefully examine their budget, pay close attention to where they spend their money and look for ways to save. For example, you might be able to work from home and save on gas or cut out unnecessary luxuries. “A smart move would be to cut some of the current spending so you can keep saving for the long-term goals,” he said.
3. Increase the risk of the investment portfolio
Another option for those already saving could be to take on more investment risk while also cutting back on spending if necessary. “If you increase your allocation so that you get a two or three percentage point higher return, and you reduce your expenses by 2% to 3% and add the power of compound interest, it can be very powerful for returns.” said Timothy Speiss, a tax partner in the Personal Wealth Advisors Group at EisnerAmper LLP in New York.
That might seem like a hard pill to swallow given recent market volatility, but for small business owners who currently have cash on hand, they may be able to leverage some assets that may be undervalued. “People are afraid to save when they see them in the red every day,” Peters said, but because of market volatility “opportunities may arise that they otherwise would not have.”
As Dan Wiener, who runs the independent adviser for Vanguard Investors, recently told CNBC’s Bob Pisani, when the S&P 500 falls more than 3.5% in a single day or a series of days, they’re mostly buying opportunities. This happened 65 times between June 1983 and the end of March 2022, resulting in an average return of 25.6% over the next year. “Buying on those big one-day price declines has mostly been profitable if you’re willing to just look at a year,” he said.
4. Make a plan and stick to it
While some small business owners might be concerned that the market will continue to fall, pension professionals said things tend to even out over time as owners regularly contribute to their pension. The underlying motivation shouldn’t be picking the best days, but creating a plan to save over the long term and stick to it.
By making regular contributions alone, investors reap the benefits of dollar cost averaging, which means you’re not always buying at a high or low price, said Kevin Busque, CEO and co-founder of Guideline. “If you set it and forget it, you don’t have to worry about the timing of the market.”
Robertson gives the example of an investor who keeps buying a fund for $500 through a high market, a low market, and a recovering market. First, the investor buys five shares at $100 each. Then he buys 10 shares at $50 each and finally he buys 6.67 shares at $75 each. His total expenses are around $1,500 and the fund’s average share price is $75. However, the total market value of his 21.67 shares is $1625.25, so he is ahead despite buying some shares at a market high and some at a market low.
“They can save whatever they want; the important thing is that they do it,” Robertson said.