Business Owners Need a 'Plan B' for Retirement Don't gamble with your golden years.

By Pamela Yellen

Opinions expressed by Entrepreneur contributors are their own.


Are small business owners too busy to think about retirement? That's one take from a startling new report from BMO Wealth Management. It found only a fraction of the nation's 28 million small business owners are prepared for retirement. For instance, 75 percent have saved less than $100,000 in retirement funds.

Small businesses, defined as companies with fewer than 500 employees, represent 99.7 percent of all employer firms -- employing almost half of all U.S. workers, according to the U.S. Small Business Administration (SBA). So how is it that owners of these "little engines" that drive our economy are neglecting their own retirement?

To answer that question, we need to understand a bit about these business owners. Most established, successful business owners and professionals tend to fit in one of two camps:

Related: The Retirement Plan Strategy Small Business Owners Need to Know About

Business owner type 1.

Your business is your primary savings and retirement plan. You reinvest most of your profits into your business. You have confidence in your business, so you keep rolling the dice in the hopes of building your company and increasing your revenues.

Many business owners are banking on selling their businesses to retire, but that is a very risky proposition. There's no guarantee you'll be able to sell your business for anything even close to what you think it's worth -- and you might not even be able to sell it at all.

Industries and markets get disrupted -- sometimes overnight. The statistics about selling a business are sobering -- only 20 percent of businesses listed for sale ever sell, and if you're one of the lucky ones who gets it done, the IRS will take up to 45 percent of the sales price in taxes.

Business owner type 2.

These individuals are more diversified outside of their business. Some may hold conventional retirement accounts such as a 401(k), IRA or profit sharing, college savings, real estate investments or cash stashed in a savings or money market account for fast access to capital.

Both types of business owners face risks associated with conventional investments and the risks of not being able to sell their business for what they expected.

Related: 10 Flaws of Conventional Retirement Plans

The reality is that you're doubling down on your risk by gambling with your money both inside and outside of your business. Regardless of which type best describes you, the critical question you should ask yourself is this -- "What's my 'Plan B' for my business?" How can you create a Plan B that will help you retire safely and securely? Start by asking what your retirement account be worth on the day you plan to tap into it? Most business owners cannot answer this question.

The problem with conventional financial and retirement planning is that it's based on things you can't predict or control, like how much money you'll really have when you retire or how long it needs to last. If you don't know the value of your retirement savings when you're ready to tap into them, you're gambling, pure and simple.

In his book, Predictably Irrational, behavioral economist Dan Ariely explains how we human investors typically forget about our losses and mentally exaggerate our successes. (You've gotta love the name of Ariely's institute -- The Center for Advanced Hindsights.)

So, let's pause for a stock market reality check.

  • Most people saw their investment accounts plunge by 50 percent or more when the dot-com bubble burst. Many investors had moved their money into NASDAQ technology stocks, which plunged 78 percent between March 2000 and October 2002.
  • Investors who diversified beyond tech stocks didn't fare much better. The S&P 500 lost 49 percent in that same period.
  • After the S&P 500 peaked in October 2007, it proceeded to lose 57 percent by March 2009.

That's two heart-stopping losses we've experienced -- just since the year 2000. But it's even worse than that for most of us. Since 1994, DALBAR, Inc., the leading independent, unbiased investment performance rating firm, has studied the actual long-term results investors get in the market. The DALBAR 2016 Quantitative Analysis of Investor Behavior includes some truly shocking findings. Consider that over the last 30 years:

  • Investors in equity mutual funds have averaged 3.66 percent per year -- beating inflation by only 1 percent! (Was that worth the sleepless nights?)
  • Asset allocation fund investors earned only 1.65 percent per year -- which didn't even come close to beating inflation.
  • Pity those who invested in fixed-income funds -- they averaged only 0.59 percent per year.

Related: Here's How Much a Millennial Needs to Save Each Month to Retire With $5 Million

Clearly most investors, including millions of small business owners, have been digging themselves into a hole they may never be able to climb out of.

Despite the big lie Wall Street tries to sell us, you don't have to risk your money to grow a sizeable nest egg. There are safe, predictable savings methods used by hundreds of thousands of Americans that can help small business owners take control of their financial futures and act as their own sources of financing.

Wavy Line
Pamela Yellen

Financial security expert

Pamela Yellen is a financial security expert, a two-time NY Times best-selling author and President of Bank On Yourself. Pamela's latest book is "Rescue Your Retirement: Five Wealth-Killing Traps of 401(k)s, IRAs and Roth Plans – and How to Avoid Them."

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