“Why Small Business Owners Have No Retirement Savings”

As a family law attorney, I see the inner workings of the financial lives of a lot of different people. Government workers, law enforcement, oil-field workers, health care workers—and lots of small business owners. Over the years, one thing that has really stuck out to me is how seldom small business owners have any kind of a retirement plan. They will often have an IRA or 401K type plan that they opened 20 years ago and have $2,000 sitting in, and that’s about it.

I think there are several reasons for it.

First, business owners struggle at the beginning. It is hard work, you need a bit of luck and good planning, and you’re most likely going to end up incurring debt during the initial process. So when money finally becomes good, the first thing you do is pay some bills, breathe a little, and enjoy some luxuries. After all, you’ve been telling your family that you’ll take that trip “next year” for the past 5 years…and…well…now you’re going to do it. New car, new house, whatever it is—it’s coming in front of retirement plans.

Second, most business owners have one big retirement plan: the business itself. After all, if it makes a lot of money and is worth a lot, you can either sell it, or just manage it and keep the profits, right? So the money goes back into the business for advertising, building a good core of employees, equipment, location expansion, or other things related to making the most money possible. This works out well for some people—if everything goes to plan, it works. The problem is that things do not always go to plan—the economy changes, new regulations can cut profits, and technology has made most businesses vulnerable to becoming obsolete if they are not willing to change.

Third, when you don’t have enforced savings through an employer, it is hard to build the habit. You go from not even seeing the money as it comes out of your payroll deduction, to feeling every penny when you write the check to your investment guy.

Fourth, because most of the savings of a small business owner are in IRA or other semi-liquid form, they are often used as bargaining chips in a divorce. Need to equalize the value of the business against something? Need to balance out equity in a house so you can keep it? Well, use the IRA. Sometimes hard decisions have to be made, and the retirement is the first thing to go.

The Bottom Line: if you’re a small business owner, you need to commit to making sure you are saving during the good years. Everyone has bad years that you just survive, but when those good years come, the money needs to be flowing to the retirement. Consider using an automatic monthly deduction system, and definitely take advantage of all the tax breaks that you can. It can help even out the tax burden that swings wildly up and down as profits go up and down.

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