Small Business Owners: How To Increase Your Retirement Savings by $1M

Steve Sweeney

4 years ago

This article will review how prepared U.S. workers and business owners are for retirement, and then explore how you can increase your retirement savings by $1M.

Americans are Unprepared for Retirement

The 20th Annual Transamerica Retirement Survey of Workers found that many are at risk of not achieving a financially secure retirement. Here are some key findings:

Top retirement fear across generations: outliving savings and investments
33% of Millennials either have or are planning to dip into their retirement savings (as opposed to 22% overall)
Household debt Is pervasive across generations
Emergency savings are alarmingly low
Seven in ten workers are currently saving for retirement (70%)
More than half plan to work past age 65, and more than half plan to work during retirement
Three in five believe they are saving enough for retirement, but 44% only guessed their retirement needs

According to the National Foundation for Credit Counseling (NFCC), less than 20% of U.S. adults feel very confident about retirement savings. The top personal finance worry continues to be retiring without having enough money set aside.

Many Americans haven’t fully recovered from the recession of 2008 when they saw retirement account losses of $2.6 trillion.

And if that wasn’t enough, 54% of Americans say their retirement planning was detrimentally impacted by The COVID-19 pandemic, based on a new study by the Center for a Secure Retirement.

“Four out of Five Working Age Individuals Have Retirement Savings Less than One Times Annual Income”
Retirement in America: Out of Reach for Working Americans?, National Institute on Retirement Security

Business Owners are Even Less Prepared

While the Transamerica and NFCC studies confirm inadequate retirement savings as a top financial concern for workers, SBA research suggests that business owners are further behind the curve.

According to a Pew Charitable Trusts survey of 1,600 small businesses, the top reasons for not having a retirement plan were: 1) The expense of setting them up and; 2) The administrative burden of maintaining them.

And according to the Pew survey, 75 percent of business owners said they would not likely start a plan in the next two years (maybe because of the presumption of high costs and administrative burden).

Small business owners participate and contribute to retirement accounts at low rates:

IRA ownership for business owners was only 36%
Only one-third of owners with an IRA contribute consistently

“Retirement account ownership, contribution, and participation rates for all business owners are low.”
SBA, Office of Advocacy

Three Retirement Finance Fundamentals:

Compounding is the best way to build investment value over time. Many techniques to build wealth use the power of compound interest (earned interest on interest)
Rule of 72: An 8% rate of return will double an investment every 9 years
If you procrastinate in starting to save for retirement, you lose the last (largest) doubling

How to Increase Your Retirement Savings by One Million Dollars

Using the fundamentals listed above, here is how to reduce worry and increase your retirement savings:

Have a plan. Those that have a retirement plan save 3 times as much as those without.
Start early and contribute consistently. Allow the power of compound interest to do the heavy lifting.
Use investment accounts to earn market rates (40-year S&P 500 Index return = 9.9%).
Invest only in low-cost choices (like index funds or exchange-traded funds).
Keep retirement money where it belongs (resist the urge to borrow against your retirement).
Use retirement savings vehicles for tax-free or tax-deferred growth.

Start Early And Contribute Consistently

Lisa and Larry are accountants that graduated together from the same college. They both started at a large accounting firm, and after working at several smaller firms, eventually, they each created their own practice. In wanting to secure their retirement, they both follow the above playbook — with one exception.

Lisa starts investing at age 25, but Larry waits until 35.

Which nest egg would you rather have at retirement?

Waiting 10-Years to start could cost you $1M

Lisa
- Starting at age 25
- Savings rate = $500 per month
- Interest = 8% APR
- 40 years of consistent savings (retire at age 65)
- Monthly interest earned at retirement = $11,556
- Value of nest egg at retirement = $1,745,504

Larry
- Starting at age 35
- Savings rate = $500 per month
- Interest = 8% APR
- 30 years of consistent savings (retire at age 65)
- Monthly interest earned at retirement = $4,932
- Value of nest egg at retirement = $745,180

Lisa’s retirement savings tower over Larry’s at age 65.

In order to make up the deficit and retire at 65 (like Lisa), Larry will need to contribute $1,171.20 each month for 30 years. He could also work an additional ten years and retire at age 75 (or some combination of increased contribution and later retirement).

Increase your retirement savings like Lisa!

“Slow and steady, steady and slow, that’s the way we always go.”
Goofy’s Big Race, Walt Disney

Sources

Whether this is a problem you are currently facing or just something that has been weighing on your mind, feel free to contact me via phone or email so we can discuss your situation, goals, and solutions.

I built my first career in management consulting and have spent the last 20+ years putting my passion and skills to use in community and economic development. For the past seven years, I have provided business advice to hundreds of start-ups and small businesses.

Table of Contents