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The Retirement Paradox: Confidence Soars, Bank Accounts Don’t
A Reality Check for Entrepreneurs
Raise your hand if you’re a business owner who dreams of ditching the hustle and sipping pina coladas on a beach, guilt-free. Now, keep it raised if you have a million stashed away for said Pina Colada Retirement Plan.
Reality check: Despite a whopping 56% of entrepreneurs claiming total retirement confidence, their bank accounts tell a different story. Turns out, a staggering 75% of solopreneurs haven’t even cracked the half-million mark, according to BizJournal.com.
CNBC reveals another harsh reality: Only 13% actively participate in retirement plans, a stark contrast to the nearly three-quarters of traditional workers diligently securing their future. Solopreneurs, on average, have account balance of $61,735, while their traditional counterparts revel in a mean balance of $122,800.
According to SCORE, as recently as 2019: those without a retirement plan, 37% struggled with small profits, 21% used previous savings for their businesses, and 18% bank on selling their businesses to fund their golden years.
No surprise that 60% of business owners express a willingness to leave today if their financial security were guaranteed, as BizJournal.com reports.
So, let’s get it straight: amid these sobering statistics, 56% express confidence in having sufficient funds to retire, yet three out of four entrepreneurs have less than $500,000 in their retirement savings.
So, what gives? Why the disconnect between
our sunny optimism and the cold, hard reality of our retirement accounts? In this article, we will explore the common pitfalls of retirement planning for solopreneurs, essential considerations for securing your financial future, and various retirement plan options available to optimize your retirement savings.
“I’ll sell the business and the proceeds will pay for my retirement!”
As a financial advisor, I hear this often when clients discuss retirement. My advice?
Plan as if you’ll never sell.
Confident in their businesses, yet underfunded in their retirement savings, many entrepreneurs pin their hopes on the perfect windfall from selling their business. But remember, according to the Board of Governors of the Federal Reserve System, just over 700,000 small businesses didn’t survive the pandemic. Can we truly rely on such uncertainty for our golden years?
Countless young entrepreneurs I’ve seen in their 40s, with all their assets tied up in their businesses, become unexpectedly vulnerable, putting their families at risk, when business struggles or health issues arise. Businesses can be volatile and unpredictable, and without a dedicated retirement plan your financial future can be jeopardized overnight.
Don’t overestimate how much you’ll get in the end. Selling a business can be a big payday for entrepreneurs, it is important that entrepreneurs don’t count on that as their sole source of retirement income. Many times, entrepreneurs believe their business is worth much more than the actual market value, so we typically factor in a significant discount in retirement projections for our clients.
Setting up both retirement and diversified taxable accounts, and diligently saving in them, is critical for every entrepreneur. There’s no guarantee you’ll sell your business for retirement funding, and even if you manage to do so, taxes and unforeseen circumstances might leave you short. Don’t gamble with your future – start diversifying and building a secure retirement plan today.
Bridging the Gap: Income Inequality and Securing Retirement
Solopreneurs earn the lowest median household incomes and experience the highest poverty rates among all workers. While the average self-employment salary in the US sits at $84,305, this figure masks a vast income disparity. The bottom 10th percentile struggles with a meager $47,000, while the top 90th percentile enjoys a lofty $148,000.
Traditional W2 employees often receive onboarding reminders to enroll in 401(k) plans, prompting them to prioritize retirement savings early on. This crucial step is often neglected by solopreneurs, but it shouldn’t be. No matter your current income level, you can and should act year one: open a retirement plan!
Even if your early income is modest, some plans offer powerful tax-advantaged opportunities, particularly with Roth contributions. This lets you grow your retirement savings in a tax-free account, with high annual contribution limits and no income restrictions. It’s a game-changer for securing your future, regardless of current income disparities.
By taking control of your retirement planning from day one, you can bridge the gap between your present income and a secure future.
So, what are your retirement plan options?
Flying solo gives you a lot of choices. Here are the most common self-employed retirement plans:
· Traditional or Roth IRA
· Traditional Solo 401(k) or Roth 401(k)
· SEP IRA
· SIMPLE IRA
· Defined benefit plan
Traditional or Roth IRA
Ideal for transitioning from a job to your own business. Roll your old 401(k) into an IRA to boost savings. Contribution limit: $6,500 in 2023 ($7,500 if age 50 or older). For 2024, it’s $7,000 ($8,000 if age 50 or older).
Traditional Solo 401(k) or Roth 401(k)
Best for solopreneurs with no employees (except a spouse). Contribution limit: $66,000 in 2023, plus a $7,500 catch-up contribution. It’s $69,000 in 2024, plus a catch-up contribution. Contribute as both employee and employer for deductions and tax benefits. No IRS filing requirement unless the balance of the account is $250,000 or more at the end of the year.
SEP IRA/Roth SEP IRA
Best for solopreneurs or small businesses with few employees. High contribution limits: $66,000 in 2023 + $7,500 catch-up, or 25% of income (whichever is less). Warning: You must contribute for all eligible employees, not just yourself.
Note: Historically, a SEP IRA could not be a Roth IRA. However, the recently passed SECURE Act 2.0 has made it possible to make Roth contributions to SEP IRAs.
SIMPLE IRA
Best for larger businesses (up to 100 employees). Lower contribution limits: $15,500 in 2023 + $3,500 catch-up (50+). Employer match or fixed contributions required. Employees can also contribute.
Note: A SIMPLE IRA cannot be a Roth IRA.
Defined Benefit Plan
Can be an attractive option for high-income earners in careers with fluctuating income, like actors, writers, and musicians, as they allow for significant contributions based on future benefit projections. Contribution limits based on future benefits and expected income.
Once you’ve decided to open one of these accounts, you’ll have to decide where to do it.
Most online brokers will allow you to open the four most common account types: IRA, solo 401(k), SEP IRA and SIMPLE IRA. Make sure to consult with your financial advisor on this matter.
How much is enough to retire comfortably?
In my experience, the question I hear most often is: “How much do I need to retire comfortably?” My answer? “It depends.”
However, a one-size-fits-all number isn’t helpful. Ask three financial experts how much you need to save, and you might get three different answers. Merrill Edge and some big banks like J.P. Morgan and Charles Schwab often use round figures like $1 million, while others focus on your personal spending: enough to maintain 80%-90% of your pre-retirement income. Other strategies involve formulas, like saving 12 times your pre-retirement salary.
But the crucial question is: what’s right for you? Your ideal retirement savings amount depends on your unique circumstances, including your desired lifestyle, income, expenses, and even your business aspirations. Ditch the generic numbers and focus on crafting a personal retirement plan that reflects your specific goals and financial reality.
Other Things to consider:
Don’t undermine your Social Security. A common mistake I see among self-employed business owners is aggressively minimizing their taxes. While tax planning is important, prioritizing short-term gains by reporting very low income year after year can significantly reduce your future Social Security benefits. It’s a trade-off: lower taxes now versus a smaller income stream in retirement.
Have an exit strategy. A staggering 34% of small business owners lack a succession plan, which can leave them in a difficult position as they approach retirement. Ideally, start mapping out your succession plan in your 50s, at least five to ten years before you envision retiring. This ensures a smooth transition for your business and financial security for you.
Conclusion
Don’t let money worries or retirement years down the road stop you from making progress. Your future self, sipping that piña colada on a pristine beach, deserves better. Today, build the solid foundation for that dream. Research your options, explore self-employed-friendly retirement plans, and don’t hesitate to seek professional guidance. Every step you take now is a brick laid on the path to a secure and fulfilling retirement. Invest in your future, because it’s the only one you’ve got.
Written by Natalia Ivanova
Founder and CEO, Financial Planning Specialist at NewGen Wealth Creation | Former Financial Advisor at Morgan Stanley
This information should not be relied upon as research, investment or tax advice, or a recommendation regarding any products, strategies, or any security or digital asset in particular. This material is strictly for illustrative, educational, or informational purposes and is subject to change.