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Risking Retirement on Selling the Business
By Karen E. Klein
December 15, 2012 12:03 AM EST
Photograph by Echo/Getty Images

Sell the business. That sums up how many small business owners hope to fund their retirement years. They are “significantly less likely” to have diversified retirement assets than employees do, increasing their financial vulnerability as they get older, according to a new analysis (PDF) from the Small Business Administration.

“There is a risk of significant consequences if the business goes bad,” says Jules Lichtenstein, the SBA senior economist who authored it. “There’s a double-whammy if something happens to that company because you’ll lose your income and your retirement assets.”

The findings do not surprise Marcus Newman, a vice president at GCG Financial outside Chicago. He has advised small business owners since 1997 and says he has 500 clients who own businesses with 150 and fewer employees in 38 states. “I can’t begin to tell you the number of times a small business owner tells me, ‘Look around—this is my retirement plan.’ Their idea is that someday in the future there will be a buyer for their business, they’ll sell it and the dollars generated is what they will retire on. But practically, in my experience, more clients go out of business than sell their business.”

The SBA analysis is the first time that retirement savings patterns of individuals who earn a high percentage of their income from a business and hold a high percentage of net worth in business assets have been examined in detail. The report draws on data from the U.S. Census Bureau’s Survey of Income and Program Participation. It was collected from August 2009 to November 2009 and includes responses from 4,773 business owners with fewer than 100 employees and 31,512 private wage and salary workers.

A separate study (PDF) also released this month showed that small business owners expect to retire significantly later in life—at the age of 72 vs. 68—than their wage-and-salary counterparts do; some don’t plan to retire at all.

Lichtenstein’s study shows that the owners of the smallest businesses, those with 25 employees or fewer, are significantly less likely to hold retirement assets and more likely to depend on home equity as their largest asset than are owners of larger companies, whose biggest assets are more likely to be in business equity and in stocks or mutual funds. He was unable to get separate data on self-employed individuals, Lichtenstein says, but he suspects they are even more financially vulnerable in retirement.

Newman’s experience backs that up. “Do you know how many former general contractors and plumbers and electricians are now working the aisles in Home Depot? Small business owners are not known for planning and putting money away, and many would rather invest in their business because they are entrepreneurial,” he says. Many of his clients who had hoped to sell in recent years have put off retirement indefinitely because they can’t get the price they had hoped to obtain for their businesses.

While many policies have been put in place over the years to encourage small business owners to accumulate savings in specially designed accounts such as SEP (Simplified Employee Pension) and SIMPLE (Savings Incentive Match Plan for Employees) plans, those policies have produced only minor gains, the SBA study notes.

The data Lichtenstein analyzed suggests that federal rules may need to be reexamined to help boost retirement savings for entrepreneurs, he says. The Obama administration has proposed new policies to expand retirement savings, including instituting a program of automatic IRAs for the approximately 75 million Americans who are not covered under employer-sponsored retirement plans. Such a program might be usefully expanded to include business owners as well, the study concludes.

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