Tag Archive for 'Retirement'

What is your small business retirement plan?

Anyone who has ever tried to grow a small business knows that it has at least one behavior almost exactly like a teenager: It’s always asking for more money than you can fund. But unlike a teenager, your business doesn’t have one outstretched hand – it has dozens.

Indeed, Blasingame’s 3rd Law of Small Business states: “It’s redundant to say ‘undercapitalized small business.’”

As children approach adulthood, their parent’s personal gratification is increasingly deferred. That beach-front condo or new sports car can’t compete with paying for braces or college.

Similarly, for the owner of a growing small business, the gratification that is typically deferred is funding a personal retirement plan separate from the business. Too often, funding a 401(k) plan, for example, takes a backseat to making payroll, expanding the online strategy or funding sales growth.

We wanted to know how small business owners were handling retirement planning, so we asked my radio, Internet and Newsletter audiences to select the option that best describes their plan. The good news is that four-in-ten said, “I am funding a retirement plan (IRA, 401(k), etc.) separate from my business.”

Unfortunately, the other 60% of our sample conformed to the teenager metaphor. For example: “I haven’t established a plan because my business always needs more cash,” was chosen by 23%. One-in-five of our respondents said, “I have a retirement plan, but currently am not able to fund it.” While slightly fewer, 17%, said, “I am counting on my business to provide for my retirement when the time comes.”

On this last point, whether through a sale or continued operation, some business will produce enough dependable income to fund the successful retirement of the owners. But the reality is, for many reasons, this is not a basket to put all your retirement eggs in.

There comes a time when a growing company’s operational and market critical mass should produce sustained profitability. At that point the business owner should act like a parent when the last kid is out of college – stop deferring gratification and start accruing it, like funding a separate retirement plan.

Just like weaning an adult child off of the family payroll, allocating profits to the personal retirement plan of the owner requires intention, planning and even some tough love.

Are you funding a formal retirement plan?

One of the markers of any small business is the fact that, kind of like a teenager, your business will always have its hand out for cash. Indeed, there will never be a time when you won’t have a maintenance requirement, operational upgrade or business opportunity demanding precious capital.

But there is another petitioner for proceeds that is just as important as the others which, to its own disadvantage, is often less persistent. Nor does this applicant for assets typically demonstrate the same ROI urgency as do its competitors for cash. The classic small business financial stepchild is a formal retirement plan.

Alas, there is another disadvantage: While the operating options mentioned above can be funded from a number of sources – investment, debt, retained earnings and even cash flow – retirement contributions are primarily funded by excess retained earnings. Excess means profits you’ve determined the business can do without and still fund growth. For a small business, that number too often compares in value to the proverbial widow’s mite.

And, yes, it’s true that most retirement funding is tax deductible; but, as your CPA will tell you, you’re not in the 100% tax bracket. That means the lion’s share of retirement funds is capital that could have gone to something that will always seems sexier.

Consequently, two difficult things have to happen before a small business owner actually funds a retirement plan: 1) Enough retained earnings have to be generated by the company; and 2) Someone has to tell the “teenager” it can’t have everything it wants this year.

We wanted to know how small businesses were managing these two challenges, so we asked our audience what they were doing about retirement. Forty-four percent said they contributed to a retirement plan each year. The other 56% were not funding a retirement plan, citing reasons ranging from not having the spare capital to the weak economy.

As difficult as it is to master the two steps above, 44% is not surprising. But it’s a long way from acceptable.

The good news, as mentioned earlier, is there are many tax deductible retirement options available to fit any small business owner’s financial situation, from the very simple to the not so much. Your seemingly impossible mission, should you decide to accept it, is to find the discipline to budget for and execute the funding of a retirement plan that will take care of you when your business cannot.

Small business owners answer questions about retirement

Who gets the money: the business or your retirement plan?

One of the greatest challenges for any growing small business is the fact that, kind of like a teenager, your business will always have its hand out for more money.  Indeed, there will NEVER be a time when you won’t have real, bona fide, justified upgrades, maintenance and/or market opportunities to spend your money on.

If you actually have the retained earnings to consider putting back in the business, congratulations; that means you’re doing something right.  But at some point you’re going to have to decide how to split that pot of money between investing in the business and investing in a non-business-related retirement plan.

We wanted to know how you were handling this decision and asked our NEWSLETTER subscribers and website visitors what they were doing about personal retirement. Here’s what our respondents told us:

44% said: I have a retirement plan I’m contributing to every year.
24% said: At this stage, every extra dollar is reinvested in my small business.
4% said: The recession is preventing me from contributing to a retirement plan.
28% said: I’m just trying to survive - retirement seems like a luxury right now.

It’s very pleasing to see the way this poll turned out. The largest single response was in favor of funding a retirement plan and about a third (combining the last two) were not funding retirement due to the economic conditions.   And, frankly, I was surprised to see that only about a fourth said they were giving all their money to the business.

There is no silver bullet answer to this issue for small business owners, but just be careful to not let your “teenager” become too greedy.

To participate in next week’s poll question, visit www.smallbusinessadvocate.com and vote.

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