Retirement Saving Strategies for Business Owners

Why business owners need to think about retirement savings differently.

A young small business owner florist working in a retail garden center store.
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Entrepreneurs are often described as going for the "brass ring" – taking a big chance for a big reward. However, that drive to build a company doesn't always translate to a corresponding commitment to start early to build economic independence in retirement. Blame it on the very nature of business ownership.

The popular notion of entrepreneurs striking it rich by selling their companies appears to be just that – a notion only – to most business owners. TD Ameritrade's Self-Employment and Retirement Survey, released in November, found that only 14 percent of entrepreneurs expect to fund their retirement by selling their company, compared with 19 percent of entrepreneurs who expect to draw an income from the ongoing operation of their company.

[See: 10 Steps for Retiring Entrepreneurs.]

Most of the entrepreneurs surveyed (59 percent) think they will achieve most of their retirement income goals by saving current earnings. Yet they don't put their retirement money where their mouths are: Only 33 percent have individual retirement accounts, according to the survey, while 32 percent have Roth IRAs and 13 percent have simplified employee pension IRAs. Unfortunately, 40 percent of entrepreneurs surveyed don't save at all.

Why is this? In a word, cash flow. The flexibility business owners love has a dark side, with 61 percent of survey respondents reporting that unpredictable cash flow is their biggest challenge. That explains why 83 percent of them say they have had to pause or trim their retirement savings.

"There's a lot of uncertainty in businesses," says Jules Lichtenstein, author of "Financial Viability and Retirement Assets: A Look at Small Business Owners and Private Sector Workers," released in December 2012 by the Small Business Administration's Office of Advocacy. "Profitability is the key. Owners usually provide benefits if the company is profitable, but profitability fluctuates. Business owners want the flexibility to not have to put the same amount in every year." In the perennial competition between funding retirement and perpetuating the business, the business typically wins.

Citing the success of employers automatically enrolling employees in 401(k) plans, the Advocacy report recommends a similar requirement for business owners. Whether or not that recommendation will materialize has yet to be seen, but you can adopt the same principles to ensure your retirement is safe as you steer your company's growth. According to the report, this is especially important for owners whose businesses account for at least 50 percent of their total assets. This group tends to have even more paltry retirement savings than business owners overall.

[Read: How Will Part-Time Income Affect Social Security?]

"Visualizing what the future will be like will keep you motivated," says Lule Demmissie, managing director of investment products and retirement for TD Ameritrade. Sketch out your retirement goals, just as you do your business growth goals, then put some reasonable savings goals into a compound interest calculator, she recommends. Seeing the future value of today's savings is similar to anticipating the payoff of a marketing campaign or client relationship, and likely to translate the discipline of saving from chore to cheer.

Once you absorb the potential impact of establishing a financial foundation through saving, apply the same big-picture thinking to the future of your firm. Question your assumptions about selling your company. Consultants and experts may think no one else can do what they do for their clients, and thus assume their businesses will retire when they do.

"In our practice, we see similar things. The exit strategy for the business – at some point, folks will have to retire, and they don't come up with a plan to transfer it," says David Maes, chief financial officer of financial planning and tax advisory firm Mackensen & Company. "It's challenging for most people to figure out how they'll get the value out of the company."