3 Tips for Serial Entrepreneurs to Safeguard Their Own and Their Employees' Retirement Security
Most Americans say that companies which provide 401(k) plans with plenty of support are their preferred places to work. Is your company one of these?
Working professionals can take a lot for granted about a job: the hours, the steady paycheck, the retirement plan. But serial entrepreneurs don't enjoy such guarantees: They're busy trading stability for the chance to build something new and valuable.
In my work running an investments/401(K) company, I've met many entrepreneurs who know this fact all too well. They wonder not only how to prepare for retirement, themselves, but how to make sure their employees are saving for the future, too. If you're in the business of building a business and thinking about your financial future, here are some ways to ensure retirement readiness for you and your employees.
1. Understand your retirement income sources.
A friend of mine who is a serial entrepreneur in the tech space recently told me that he wasn't saving anything for retirement, and sheepishly asked what I thought about that. I told him that saving for the future is always sage advice, but that he is not alone.
According to a recent survey by Manta, 34 percent of entrepreneurs polled said they did not have a retirement savings plan. So, where is their retirement money going to come from? A Gallup poll suggests that the majority of small business owners will delay retirement but will still need to retire eventually. The top "major sources" of retirement income among entrepreneurs are retirement accounts (see tips 2 and 3, below), social security and the sale of their business.
So, if this sounds like you, and you plan on selling your business to fund retirement, you will want to estimate how much retirement income it might produce. Start by determining an accurate valuation for your company, then subtract any taxes and transaction costs and estimate about how much of that money you'd put into long-term investments like stocks and bonds. Multiply this final figure by 4 percent, and that's about how much you might expect to withdraw per year.
2. Offer your employees a quality retirement plan.
As a serial entrepreneur, helping your employees save for retirement isn't just the right thing to do; it's critical to your success. You need to attract and retain talented staff who can help implement your vision, freeing you to execute on your next idea. And those employees will want retirement benefits.
According to our Fisher 401(k) Wellness in the Workplace study, nearly four out of five Americans surveyed claimed that companies which provide 401(k) plans with plenty of support are their preferred places to work.
That makes sense: Finances are a huge cause of stress, and I believe the problem lies not necessarily in the lack of money, but the lack of education and tools to help American workers manage their money smartly. Only about 52 percent of employers with fewer than 100 employees offer retirement plans, according to the Social Security Administration; and only 28 percent of employers with fewer than 10 employees do, versus 87 percent for larger employees with teams of over 100.
That gives any serial entrepreneur who chooses to offer a quality retirement plan a distinct advantage in the market for talent -- with little cost to the employer (not to mention the tax advantages). There are many types of retirement plans to consider should you decide to offer one. For businesses with fewer than 10 employees, I'd suggest looking at a SEP IRA or SIMPLE IRA first, as those are the easiest to set up and administer.
For employers with more than 10 employees, I would consider a traditional 401(k) plan for its flexible plan options and high value to employees. For 2018, a traditional 401(k) plan allows members to save $18,500 annually ($24,500 for those 50 or older), so you might consider adding additional plans, including:
- Profit sharing: A profit-sharing plan offers increased contributions to key employees, allowing them to save up to $55,000 per year, or $61,000 for those 50 or older.
- Cash balance: Employers with stable revenues and lots of high-income earners might add a cash balance plan on top of 401(k) and profit sharing for enhanced tax benefits; these allow higher contributions on behalf of key employees in exchange for lower wages.
- Non-qualified deferred compensation: NQDC plans allow executives of a fiscally-sound business to defer compensation until retirement, reducing their current tax burden and provide a strong incentive for executives to run the business prudently.
3. Encourage a culture of savings.
Once you have a retirement plan for your company (or companies), that accomplishment means little if you don't encourage your employees to make the most of it. That starts with your leading by example. It's important to save more than you think you'll need, and to encourage your employees to do the same. I recommend that people early in their careers save at least 5 percent of their pre-tax income, that those in the middle of their careers save 10 percent, and later in their careers, that people save 15 percent or more.
Unfortunately, not enough workers are saving at these levels. A study by the U.S. Government Accountability Office found that between one-third and two-thirds of workers surveyed were at risk of a lower standard of living in retirement.
Half of households have no retirement savings whatsoever, and the median savings that the rest have would pay out only $600 per month, which is simply not enough to live on. While there are many valid reasons not to save -- including the rising costs of child care, I believe we should strive to develop a culture of savings within our workforce.
Businesses fail for any number of reasons, but you don't want your retirement (or your employees') to fail for any reason. As is the case with many aspects of entrepreneurship, retirement security comes down to proper planning. First, entrepreneurs need a focus on understanding where retirement income will come from. Second, they need to offer the right retirement plan for each of their companies.
By cultivating a corporate culture of savings, entrepreneurs can help ensure a bright financial future for themselves and their employees even as they work on the cutting edge today.
Nathan Fisher is the founder and senior vice president of Fisher Investments 401(k) Solutions and oversees all aspects of retirement planning services for the firm. As a staunch advocate for small- to medium-sized businesses, he helps business owners start, evaluate and optimize their 401(k) plans. Fisher's written work has been featured in a wide variety of industry publications and blogs, including Time.com, The 401(k) Blog, Investment News, and Employee Benefit Advisor Advisor magazine.