Mary Quist-Newins, MBA, MSFS, CFP®, ChFC®, CLU®
Have you heard the phrase “failing to plan is planning to fail?” This is an eternal truth when it comes to money, and especially so for women business owners. Why? Because for most, their business generates more than half of their household’s income and a significant part of total net worth. Effectively planning and then allocating business income/capital is critical to attain financial security. Since women are prone to certain financial risks at higher rates than men (e.g., longevity, lower lifetime earnings, disability, caregiving), planning is even more important.
In general, the state of retirement preparedness among business owners is troubling. According to a recent study of 400 business owners by BMO Harris Wealth Management found that three in four participants had less than $100,000 saved in retirement funds. Fewer than one in 10 had accumulated more than $500,000. Considering that 4% is generally considered to be the rule of thumb “safe withdrawal rate” for retirement assets, that amounts to just $4,000 per year out of $100,000 for most business owners. Yikes!
The possibility of early retirement due to unforeseen circumstances compounds the consequences of inadequate preparation. A recent study from the Employee Benefit Research Institute found that almost half of Americans retire sooner than they planned. Of these, 56% cited health changes, disability and family caregiving as primary reasons. Just 24% stated they were able to afford earlier retirement and 10% said they wanted to do something else. Lesson learned? When planning for retirement it’s important to be holistic and evaluate income and assets required along with addressing possible personal risks. As women are more likely to be disabled and give care to loved ones, these vulnerabilities are especially important to consider.
Retirement Planning Concerns and Actions
Perhaps in recognition of the gaps in preparedness, most business owners cite apprehension about their retirement. As a financial planning practitioner, I often witnessed this as sort of a vague sense of unease and worry about the future. As an academic, I observed even more.
For part of my career, I had the privilege of holding the nation’s only endowed academic chair devoted to the study of women and money and founding the Center for Women and Financial Services at The American College. One research project — on women and men business owners — stood out. It revealed a major disconnect between concern over retirement planning and action. With an average respondent age of 55, over eight in 10 females in the study said they were concerned about planning for their retirement, but almost over three in four had no plan in place. Even more revealing was that 22% — just over one in five said they didn’t intend to create a retirement plan — wow.
The findings revealed that while the majority (84%) of women business owners were concerned about retirement planning, fewer than one in four (22%) had a written retirement plan. We also learned that under one in 10 (9%) of women and one in 20 men business owners had a written business succession plan. This, despite more than half of all respondents saying they were concerned about maximizing the value of their business to help fund retirement — a significant indicator of the importance of succession planning.
Retirement Planning Concerns and Actions
Many business owners view the prevailing notion of retirement — a retreat from working life — as a foreign and sometimes dreaded concept. After all, why “retire” in the conventional sense when you’re pursuing your vision for the business, family, and personal life?
Many are also pre-occupied with meeting the needs of the “here and now” like cash flow and accumulation of reserves. Others plow everything back into the business, sometimes not even taking personal income let alone putting money aside for retirement.
Without good planning, retirement can just be an abstract concept. In the press of the business, it can be hard to separate oneself from the tangible “here and now” to plan for an intangible retirement concept.
While these competing demands are understandable, they are fundamentally dangerous if they get in the way of a well-thought-out and prudent plan. After all, most business owners take on far more risks than those employed by others. This means taking action to plan for retirement is critical and especially important for women due to higher risks mentioned above.
Five Tips for Action
1. Reframe “Retirement”
I encourage clients and students to think less about “retirement” in the conventional sense and more about being “financially independent” since many envision themselves working late into life. Financial independence means having the option, not the requirement, to work. It is that point in time when you have sufficient assets to provide target income for the rest of your life, your spouse’s life, and the legacy you wish to leave others.
2. Visualize and Quantify Income
Next, identify your desired lifestyle, interests and passions to explore. Will you move, downsize, provide funds to children and/or charity, or pursue other lifelong goals? How will life fundamentally change from what it is today? For help fleshing out retirement and other financial goals, check out the free Moneyweave® Academy SMART Goals workbook.
3. Do the Math
There are widely available free online tools to make a simple retirement projection. Here is a link to a retirement savings calculator on the Moneyweave® Academy website to get you started.
While online calculators have their limitations (for example, they don’t evaluate the impact of higher inflation on expense line items like health care), they can be an important step in the planning process. How? Because they increase awareness of what it might take in capital assets to fund retirement/independence. Even if you discover that funding gaps are deep and wide, increasing clarity gives you greater control and more purposeful action. It’s better to have this information early so you can adjust your thinking, plan, and implement a course of action, if necessary.
4. Diversify Your Retirement Resources
We all know the wise old saying about not putting all of our eggs in one basket. So it goes with diversifying resources for financial independence. Diverting income from the business to build up personal retirement/independence savings is essential to managing risk and accumulating resources, sometimes on a tax-favored basis.
Putting in place a basic retirement plan (like Solo 401(k), SIMPLE 401(k), SEP IRA, SIMPLE IRA) is a frequently recognized first step. Initially, you want to consider well-diversified funding mechanisms within those plans like strategic asset allocation mutual funds that rebalance as the markets change with relatively minimal expense.
5. Hire a Qualified Financial Planner
A range of studies indicate that most people generally do better when assisted by a well-qualified, trustworthy financial advisor. Research also affirms that the costs of hiring a professional is often more than made up in improved investment performance, risk management, and peace of mind. It’s also been my experience that retirement planning for business owners can be very complex. Even if you believe you are well on your way, the value of a second opinion cannot be overstated.
That said, a word of caution. Be very careful in your choices, especially when seeking out a “financial planner” since the use of that term is not regulated. Vet your professionals carefully. I find the “10 Questions to Ask When Choosing a Financial Advisor” by the CERTIFIED FINANCIAL PLANNER® Board gets at the important things to evaluate. You should also check out the experience of financial brokers, advisors and firms on the FINRA Broker Check website.
Don’t be discouraged if you’re not yet where you want to be. Retirement planning is a journey and it begins with a single step. Start yours today.
Copyright©, Mary Quist-Newins, October 2022, All Rights Reserved
About the author, Mary Quist-Newins, MBA, MSFS, CFP®, CLU®, ChFC®, Founder, Executive Director and Chair, Moneyweave® Academy