I wrote an article earlier this year about how much we need to be saving for retirement. It turns out that small-business owners are among those most at risk. A recent AP report posted by MarketWatch shared the stories of a number of business owners who simply ignored their own futures and focused almost entirely on developing their businesses. Many viewed their companies as their nest eggs, planning to sell them to fund their retirement. Is this a wise strategy?
Kari Warburg Block didn’t even think about saving for retirement until she was unable to get a loan for her fourth business. The banker wanted to examine her personal finances, believing that people who handle their savings and investments well would also do a good job running companies and be good credit risks. Block had never taken money for her retirement out of the companies she had previously owned. As a result, the banker denied the loan. Block found herself not only without any retirement savings, but also with future prospects constrained.
She’s not alone. Of the small-business owners surveyed by American Express, 73 percent said they’re worried about their ability to save for the lifestyle they want to maintain in retirement. A study by the Small Business Administration found that only approximately one-third of owners had contributed to their individual retirement accounts in 2006, and only 18 percent had a 401(k).
How much can you lose?
I have personally known many Silicon Valley entrepreneurs over the years. What sets apart the successful ones from the unsuccessful ones is not, as one might surmise, having a great idea or being especially talented or even being in the right place at the right time. The key success factor is knowing how much they can afford to lose before making the decision to invest in a new business.
That may sound trivial, but it assuredly is not. I’ve found that entrepreneurs who were able to identify and stick to their limits were the ones who, more often than not, successfully rode out the downturns. Rather than raiding their retirement savings to prop up their businesses, they would liquidate the businesses, learn from the failures and start working on the next one, all the while supporting themselves using their savings. Their finances weren’t tied up in a single entity.
Small-business owners are naturally sanguine about the prospects for their businesses.
Michael Maher, co-owner of a clothing retailer in San Francisco, is using his own savings to start and build the company.
“We’re plowing all our money back into the company for the most part and taking a nominal salary,” he said.
And Maher believes that a company he runs is a better investment than the stock market.
“I am investing money in a business that I think is viable and that I control instead of investing in something that I don’t control,” he said.
But there are many factors beyond a business owner’s control. Take 2008. The plunge in lending to small businesses, together with the slowdown in both business and consumer spending, forced many owners to liquidate personal assets like bank accounts, stocks and mutual funds to keep their companies afloat. When you concentrate most of your assets in a single investment such as your business, you can easily be left with nothing should it collapse.
How can you determine how much you can afford to lose in a startup business? That part’s easy. It’s all about planning for your future.
For more information, see the column I wrote on this topic several months back (“Are we saving enough for retirement?” March 27).
Los Altos resident Artie Green is a Certified Financial Planner with Cognizant Wealth Advisors. For more information, call 209-4062.