Boom or Bust?

Cash flow and liquidity are just part of the entreboomer's problems. Unlike employees who benefit from corporate retirement plans, too many entrepreneurs rely on the profitability of their businesses to see them through retirement.

Allan Ross, a CPA and consultant in small-business management, notes the market value of most small businesses is based on recent years' profits or cash flow. "As a result," says Ross, "several bad years can have a severe adverse effect on the selling price of the business-and the amount of money available for retirement."

"Many times, small-business owners approaching retirement are reluctant to make any additional investment in their businesses to keep up with changing business circumstances. They try to 'milk' the business for all they can. This will work in some industries, but in others, it can backfire, producing a loss of business and reduced cash flow just before the retiree is ready to sell the business."

Many entreboomers dream of early retirement, but despite what the numbers indicate, they may be working longer, harder and for less money than today's retirees unless they begin funding retirement plans and savings.

Financial advisors contend having a comfortable lifestyle after retirement requires an income of almost 80 percent of an individual's average income in his or her last five years in the labor force. A study released by Merrill Lynch & Co. Inc. calculated that, when the value of a family's home was not taken into account, baby boomers are saving at only one-third the rate necessary to maintain their current level of consumption in retirement.

Social Insecurity

Adding to this dilemma, entreboomers, unlike their parents, may not enjoy the safety net of Social Security. According to the Employment Benefit Research Institute, in 1992 Social Security comprised just 42 percent of the income of the population aged 65 and older and will provide an even smaller benefit in the future.

Several conclusions are clear. If you keep going the way you're going, you may be able to retire in style . . . or you may not. To start building the foundations for a solid financial future, here's what you can do:

• Keep track. You may not realize it, but you probably spend too much money on-well, who knows what. Try tracking your expenditures for a few weeks or a few months. You'll be surprised how much you spend at the cappuccino counter and office supply store.

• Beware your spending pitfalls. All of us have places where we tend to splurge without realizing it. Whether it's new computer software, a new suit or new office equipment, ask yourself twice if you really need it now.

• Invest automatically. Every month, have money drafted from your bank account into some kind of retirement plan. Ideally, put in the maximum allowable, but don't worry if you can't: Even $2,000 placed in an IRA annually can help you on your way.

A financial advisor can help you pick the plan that's right for your needs.

• Allocate your assets among stocks, bonds and cash. If you want growth, you'll have to invest in stocks. Start small, and add a little each month.

Begin with these small steps, and soon you'll be on the road to financial success.

This article was originally published in the February 1996 print edition of Entrepreneur with the headline: Boom or Bust?.