Arlin, Scott & HTG on Retirement Planning
You’re obsessed with building your business. But if you’re like 60 percent of entrepreneurs, you aren’t saving the money you need for retirement, according to an American Express survey of small business owners. Here’s why many Total Services Providers (TSPs) stumble on retirement savings — and some practical advice to get started.
First, the good news. Generally speaking, TSP businesses are on firm financial footing. For most TSPs, blended revenues (IT projects, managed and cloud services) provide ample cash flow for payroll. And you likely pump any extra dollars back into the business — helping your staff to earn new certifications and more.
Last In Line?
But what about you — your personal bank account and your personal net worth? Poke around the IT channel, and you’ll find entrepreneurs who concede: Sometimes during lean years, they didn’t take a salary for weeks or months at a time, focusing instead on maintaining payroll for their employees. By extension, there’s often no money left over for retirement funds, either.
“[Retirement planning] awareness is going up as the age of the average IT entrepreneur increases,” said Arlin Sorensen (pictured, @asorensen), founder of HTG Peer Groups. “But overall many [owners] are still banking their future on the value of the business they are building – often without any real truth in that number – and will get surprised that their business isn’t worth anywhere close to what they had hoped.”
Adds Scott Scrogin (@ScottScrogin), president of HTG, “I agree with Arlin’s feedback and find it interesting that the ‘retirement’ word seems to be strangely evasive in the vocabulary of the business owner and entrepreneur. It’s almost a badge of honor not to discuss it as an objective rather than a negative. Not so much repelling like kryptonite but rather a distant concept…until it’s no longer distant.”
“It’s not often enough that the word or concept of “retirement” is formally addressed in one of our groups,” continues Scrogin “Retirement seems like something for corporate types, spouses, parents, educators and TV ads. Owners seem to think more in terms of years “AB” or After Business and large payoffs. The more tightly you are tied to and part of the soul of your business it seems your life spent building the business is either ‘on’ or ‘off.’ “
But here’s the challenge: If a company sale doesn’t deliver a big windfall, entrepreneurs quickly discover they’re left without a long-term financial safety net. Roughly 70 percent of self-employed business owners don’t save regularly for retirement — including 28 percent of those folks who aren’t saving at all, according to TDAmeritrade.
How can entrepreneurs begin to save for the golden years? There are some basic starting points to consider, according to SavingsAccounts.com. They include:
- Individual retirement account (IRA): You can invest up to $5,500 per year ($6,500 if age 50 or older) in this type of account. Contributions are tax-deductible and earnings are tax deferred if your income doesn’t exceed specific limits ($181,000 if married or $114,000 if single).
- Roth IRA: Roth contributions are not tax-deductible, but all earnings can be withdrawn tax-free, starting at age 59 1/2.
- Solo 401(k): Business owners and their spouses can save 100 percent of income (tax deferred) up to the $17,500 limit. The limit hits $24,000 if you’re over age 50. Additional formulas are involved so check in with a financial professional.
- Simple Employee Pension IRA (SEP IRA): After Nines Inc. Co-founder Amy Katz and I depended heavily on this during our previous startup business (2008-2011) before it was acquired. At the end of each year during tax season, we plowed profits back into the business — and some additional profit directly into our respective SEP IRAs. The contribution limit is 25 percent of annual income for each employee, up to the $52,000 annual limi. But again, check in with a financial pro to see if any metrics have changed.
- SIMPLE IRA: This is for small business owners who have fewer than 100 employees — a figure that addresses the vast majority of Total Service Providers. Employees can contribute up to $12,000 annually ($14,500 if 50 or older), and the business owner must match employee contributions up to 3 percent of the employees’ annual salary.
- Defined Benefit (DB) Plans: This is the classic pension plan — which more and more large companies have abandoned because pensions often trigger lofty business costs.
What does Sorensen see among HTG membership? “In order to hire many are doing some form of retirement plans for employees,” he said. “It is competitive and they have to do that in order to get staff. Company size is a part of that for sure, but any company that wants to hire folks can’t really compete without it [a retirement plan offering] today.”
And What About Me?
After Nines Inc. is now one-year old. I don’t know if/when Amy and I will each have a SEP IRA. But we’re taking some basic steps in the meantime. We both have financial advisors who oversee our respective long-term savings and investment goals.
Most of my retirement now sits in Exchange Traded Funds (ETFs) — mutual funds and bond funds that have extremely low management costs. I’ve also started to investigate so-called “robo investing” systems like Wealthfront. The system measures my risk tolerance, then pumps money into the most appropriate ETFs. Cool — though I’m certainly exposed a bit to recent market gyrations.
That Balancing Act
I realize entrepreneurs must balance a range of factors before they weigh if, when or how to save for retirement. Sometimes, pumping your profits back into the business is the absolute smartest way to build your net worth. But at some point, you may get nervous that too much of your personal net worth is tied up in the business.
Certainly, everybody’s path will vary. But I wonder: Are you taking any steps toward retirement savings? If so, how? If not, why not?
As usual, I’m all ears.