Planning for retirement in the age of uncertainty

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Small business owners are entrepreneurial in spirit but often have to tackle the task of retirement planning in addition to running their businesses.

Not only do they have to think about how to fund their own retirement, but how to offer incentives for their employees to contribute to their own retirement plan.

“That all depends greatly on exactly what the business owner is looking to achieve,” said Nick Salezze, retirement plan department head for Client 1st Financial of Fogelsville.

Mass Mutual plans work for both large and small companies, he said.

“In today’s environment, 401k programs can be custom built,” Salezze said. “You are responsible for your own retirement. The biggest indicator to success is how much you contribute.”

While there are many paths that business owners can follow, most financial professionals agree that planning for retirement is every person’s responsibility. Business owners need to retain good employees, attract new ones, stay competitive and be mindful of the aging workforce.

“Don’t plan on the business being your entire nest egg,” said John Rossi, associate professor of accounting at Moravian College in Bethlehem. “What was a good business today may not be in 10 years.”

Often, the value of a small business will change over the years. As an example, he said owners of beer distributors or liquor stores may not have as successful a business with the advent of more grocery stores selling liquor and beer in Pennsylvania.

In addition to retirement, small business owners also need to focus on succession planning and having someone who can be mentored to take over the business long before retirement, Rossi said

Tax deferred life insurance annuity plans are a good way for small business owners to accumulate cash for retirement, in addition to putting money in personal savings, said Rossi.

A lot of people think that when they retire, their costs go down, but often with more time on their hands, they find themselves spending more money, said Rossi. Coupled with rising health care costs and the increasing trend of children tapping into their parent’s wealth because of job losses, many proprietors of family-owned small businesses are delaying their retirement or going back to work out of necessity.

“There’s a lot of people going back to work for survival,” said Rossi.

A lot of small business owners are doing simple IRA plans because of the new 401k regulations, said Justin Miller, financial planning assistant for Milestone Financial Associates LLC of Macungie.

“These are plans for companies under 100 employees but they don’t allow business owners to contribute as much as if they had a 401k,” said Miller.

Business owners who are 20 years from retirement age are generally more focused on making the business profitable than thinking about retirement, said Salezze. However, those who are about five years away from retirement are starting to realize whether they have enough money to cover their entire retirement.

“Many small business owners say they want to set up a 401k plan because that is the plan they are most familiar with,” said Ken Hevert, vice president of retirement products at Fidelity Investments. “However, after reviewing their situation, small business owners often conclude that perhaps another plan type, such as a SEP-IRA or a Self-Employed 401k, may be more appropriate.”

With 401k plans, the company match also is making a comeback, said Salezze. Businesses feel they have recovered from the hit in 2008 and more businesses are adding a company match to their 401k plans.

SEP-IRAs and Solo 401k plans remain popular since some of the rules are more favorable for small business owners, said Miller. Solo 401k plans are for sole proprietors who set up a 401k for themselves as if they were an employee at a company that offered a 401k plan. Each plan type has its pros and cons, he added.

“Business owners are trying to contribute as much as they can so employees can see the value and are more likely to stay,” said Miller.

“If a business owner knows what they are trying to accomplish with their retirement plan, it may be relatively straightforward for him or her to determine which plan is most appropriate for the business,” said Hevert. “For example, is ease of administration an important consideration? Is it critical that employees be able to contribute to the plan? Knowing what you want and need ahead of time is a key component, because each plan has its advantages and disadvantages.”

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