Small business owners are among the Americans most likely to fall behind when it comes to retirement savings. Reinvesting in a business is more often a priority for entrepreneurs with excess cash than investing in a long-term tax-deferred retirement plan. Covid didn’t help.
Amid the pandemic, dozens of U.S. small business owners have stopped or reduced their retirement savings, investment professionals and retirement experts say, pressured by rising labor costs and raw materials, or in the worst case, facing business closures.
Granted, the pandemic hasn’t hurt every small business when it comes to retirement planning. Thirty-seven percent of small business owners say they are not confident they are saving enough for retirement, according to a March survey by ShareBuilder 401k of 500 small businesses. But that’s down somewhat from the 44% who said two years earlier that they weren’t confident in their ability to save for retirement.
Some data shows that, at least on the fringes, savings rates for small business owners have mirrored the rise for 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. For its part, Vanguard saw participation rates for small businesses rise to 73% in 2020 from 72% a year earlier, and deferral rates — the portion of an employee’s salary that is contributed to retirement — rise to 7. .3% in 2020, compared to 7.1% in 2019.
But those results don’t generally reflect the experiences of many of the country’s smaller companies, including those in particularly hard-hit sectors. Many of these companies have fallen behind on their retirement savings goals over the past few years for various reasons and need a boost, say finance professionals. Coupled with the fact that many homeowners never saved for retirement, recent market swings could make this a good time to consider saving 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
As a rule of thumb, investment experts suggest saving 10% to 15% of your income per year over a 40-year career — just to maintain the same standard of living in retirement, says Stuart Robertson, CEO of ShareBuilder 401k . Yet the March survey found that only 38% of companies surveyed were saving 10% or more. Meanwhile, 24% said they are not currently contributing.
2. Cut the budget and redirect to savings
David Peters, founder and owner of Peters Tax Preparation & Consulting in Richmond, Va., told business owners to carefully consider their budget, paying close attention to where they spend their money and looking for ways to reduce. For example, they might be able to work from home and save gas or cut out unnecessary luxury items. “A smart move would be to reduce some of the current expenses so you can continue to save for long-term goals,” he said.
3. Increase investment portfolio risk
Another option, for those who are already saving, could be to take on more investment risk, while reducing expenses, if necessary. “If you increase your allocation so that you get two or three percentage points more on a rate of return, and you reduce your expenses by 2% to 3%, and you add the power of compounding, that can be very powerful for returns,” said Timothy Speiss, tax partner in the Personal Wealth Advisors Group at EisnerAmper LLP in New York.
This may seem like a tough pill to swallow amid recent market volatility, but for small business owners who have cash right now, they may be able to take advantage of some funds that may be undervalued. . “People are afraid to save when they see the red numbers popping up every day,” Peters said, but due to market fluctuations, “there may be opportunities they wouldn’t otherwise have.”
As Dan Wiener, who runs the independent advisor for Vanguard Investors, recently told CNBC’s Bob Pisani, when the S&P 500 falls more than 3.5% in a single day or series of days, it’s mostly buying 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 on those big one-day price declines has been profitable more often than not if you’re willing to only look at a year,” he said.
4. Create a plan and stick to it
Although some small business owners fear the market could go down further, retirement savings professionals said things tend to balance out over time when owners contribute regularly in retirement. The underlying motivation shouldn’t be picking the best days, but creating a long-term savings plan and sticking to it.
By simply contributing regularly, investors gain the benefits of cost averaging, which means you’re not always buying high or low, said Kevin Busque, CEO and co-founder of Guideline. “When you set it and forget it, you don’t have to worry about market timing.”
Robertson gives the example of an investor who regularly buys a fund for $500, during a high market, a low market and a recovering market. First, the investor buys five shares at $100 each. He then 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. Yet the total market value of his 21.67 shares is $1625.25, so he is ahead even though he bought some shares at a market high and some at a market low.
“They can save any way they want; the important thing is that they do it,” Robertson said.