Small-business owners are just as unprepared for retirement as the rest of us.
According to a new report from BMO Wealth Management, only a fraction of the nation’s 28 million small-business owners are prepared for retirement. BMO called the results “startling.”
The report — titled “As a business owner, do you have a retirement contingency plan?” — explores private business owners’ retirement goals and how they are planning to fund their retirement. Its primary finding is that the majority of business owners between 45 and 64 years old are not financially prepared for the retirement they envision.
“We found that fluctuating profitability affects business valuations and the funds available to support the retirement lifestyle of business owners,” said Jason Miller, National Head of Wealth Planning, BMO Wealth Management. “Planning for retirement can be difficult when a retirement date is not entirely under owners’ control, especially if they are depending on the sale of their business or continuing to draw income from the operating business.”
According to the survey:
- 75 percent of small business owners have saved less than $100,000 in retirement funds. In the upper age bracket (ages 45-64) the entrepreneurs were only slightly more prepared – 68 percent have saved less than $100,000.
- Only 8 percent had saved more than $500,000, which is still not considered enough for retirement for many people.
Miller says they weren’t surprised by the results, “Unfortunately, the results bear out what we see in practice. I don’t know that there were any surprises.”
And why don’t small-business owners save?
“We have tremendous respect for small business owners,” he says. “They drive our economic activity. But starting and running a small business is challenging, especially through economic cycles. They become very focused on running their business, and lots of times that requires any profit made in the business to be re-invested to make it grow. Unfortunately, sometimes personal retirement planning is not done along side of that.”
The survey also uncovered the amount of income these businesses generated over and above what they used to meet personal expenses and how much they were saving for retirement. More than 90 percent paid themselves less than $100,000 a year, with 1 percent drawing $500,000. Four out of every five (81%) of the respondents indicated they were able to save $25,000 or less for their retirement on an annual basis.
The report also shows that business owners are challenged with succession, exit plans and business valuation. The most cited preferred exit options for the survey respondents were:
- Sell to buyer unrelated to family (25%)
- Transfer at no cost to family member (22%)
- Wind down (close) the business (11%)
- Sell to family member (7%)
Business owners considering a transfer or sale within the family must also determine if there is even interest from family members in assuming ownership responsibilities. A lack of interest may require additional flexibility when considering exit options.
Among those surveyed, almost one third cited finding a buyer or suitable successor was a barrier. Additional obstacles that stand out include too much dependence on their leadership of the business and valuating the business.
Miller added, “If the sale of your business is part of your retirement plan, there are steps that can be taken in advance to maximize enterprise value and after-tax proceeds. Also, it cannot be emphasized enough that an effective retirement contingency plan should include savings outside of the business assets.”
His tips to help small-business owners better plan for retirement:
“To the extent possible, be mindful of the idea that along with building a successful business, they should have a focus on accumulating wealth outside of the business. And for those nearing an exit, they should be putting together a thoughtful succession and considering the post-sale effect. They should consider the personal implications for the remainder of their retirement.
“Preparation and pre-planning is key,” he says. “It’s easy for momentum to take over. Slow down, step aside and put together a plan for contingency and business succession.”