Retirement planning for both business owners and their employees is crucial to maintaining financial security and retaining a specific standard of living. Eighty-eight percent of all Americans are worried about “maintaining a comfortable standard of living in retirement,” according to a 2012 survey by Americans for Secure Retirement.
Based on recent statistics, this majority of Americans are justified in their concern. The U.S. Department of Labor estimates that an individual will need 70 to 90 percent of their pre-retirement income to maintain their current standard of living once they begin retirement.
It seems that a large portion of Americans will not been able to secure the adequate “70 to 90 percent” income through their current retirement planning. The average retired middle-income American will have to “reduce their standard of living by 51 percent to avoid outliving their financial assets,” according to a 2009 study by Ernst & Young.
Additionally, one-third of U.S. homeowners, between the ages of 30 and 59, will not be able to maintain their standard of living after retirement, even if they delay their retirement until age 70, according to a 2012 study by the Employee Benefit Research Institute.
This lack of preparation has left many retirees with unwarranted debts in the past. In 2010, more than 80 percent of those between age 50 and 61 held debt, according to the Social Security Administration (SSA). The average debt amount among this age group was more than $150,000. In the same year those aged 75 and older held an average debt of $27,409. Alarmingly, that figure had more than since 2007 when the average debt was $13,665, according to the Employee Benefit Research Institute (EBRI).
One out of every six elderly Americans in 2012 was living below the federal poverty line, according to the U.S. Census Bureau. Furthermore, 56 percent of American retirees still had outstanding debts when they retired in 2012, according to a survey by CESI Debt Solutions.
What’s worse is that past research has shown debt among retirees has been on the rise throughout the past few decades. According to Boston College’s Center for Retirement Research, “Between 1991 and 2007 the number of Americans between the ages of 65 and 74 that filed for bankruptcy increased an astonishing 178 percent.”
Obviously, workers can avoid this financial insecurity by investing into a retirement plan early in their working career. By offering these types of benefits to their employees, business owners can generate leverage in attracting, hiring and maintaining quality employees. Workers these days not only need employers’ support in saving for retirement, they expect it.
Considering that small business play such a major role in American employment, offering retirement planning to employees may be a necessity for any employer. According to the U.S. Small Business Administration, in 2010, 28 million small businesses employed more than half of all private sector workers and accounted for three-fourths of new jobs in the U.S. Conversely, Only 52 percent of small business owners had retirement plans in place for their employees during 2010, according to the U.S. Department of Labor.
This apparent lack of coverage for small business employees seems to extend to the owners themselves.
Small business owners with retirement accounts are more likely to invest lower amounts into their retirement assets than employees, according to a 2010 study by the U.S. Small Business Administration Office of Advocacy (SBA).
“An important concern emerges with respect to small business owners. Financially vulnerable small business owners – those who hold a high percentage of their net worth in business assets – are less likely to invest in retirement assets than owners whose net worth is less vulnerable,” according to the SBA.
Accumulating a retirement savings and organizing an overall retirement plan is a necessity that many have seemingly overlooked. A secure retirement plan is crucial to maintaining financial stability and retaining a specific standard of living during your retirement years. Lack of preparation has left thousands struggling to pay bills and stay out of debt, forcing them sacrifice their lifestyle and assets.
These types of situations can be avoided by acquiring sufficient amounts of retirement assets. It is generally easier to accumulate assets the sooner you begin your investments. You may want to consider speaking with a trained financial advisor to decide which type of plan is best for you and your family.
There are many types of retirement plans and investments, all of which should be taken into consideration and be discussed with a professionally trained financial advisor.
401(k) plans have become a widely accepted retirement asset for small businesses. The U.S. Department of Labor estimated that 51 million U.S. workers participate in 401(k) plans which amount to a total of about $3 trillion in assets among Americans. With a 401(k) plan, employees may contribute a portion of their salary into the plan, which is sponsored by their employer. These deferrals are accounted separately for each employee. Deferrals are generally made on a pre-tax basis, but if the plan allows it, employees can choose to contribute after taxes (This is known as a ROTH 401k). Many 401(k) plans provide for employer matching or other contributions. 401(k) plans can vary greatly in their complexity. It is best to seek professional help from a trained advisor before deciding which type of 401(k) is best for you.
Some employers find that defined benefit plans offer business advantages. For example, a business owner can generally either add or reduce contributions to/from the plan each year. In addition, employees often add value to the fixed benefit provided by this type of plan enabling them to receive a greater benefit at retirement. However, defined benefit plans are often more complex and are generally more expensive to establish and maintain than other types of plans.
Employer contributions to a profit sharing plan can be discretionary. Depending on the plan’s terms, there is often no set amount that an employer must contribute each year.
If an employer does make contributions, they must establish a fixed plan for determining how the contributions are allocated among participants. The funds are accounted separately for each employee. Just as a 401(k), due to their complexity it is best to seek professional advice when deciding to use a profit sharing plan.
An SEP plan allows the employer to set up individual SEP IRAs for themselves and each of their employees. Employers must contribute a uniform percentage of pay for each employee, although they do not have to make contributions every year. SEPs allow you to decide how much to put into it each year, which offers some flexibility.
An SEP plan allows the employer to set up individual SEP IRAs for themselves and each of their employees. Employers must contribute a uniform percentage of pay for each employee, although they do not have to make contributions every year. SEPs allow you to decide how much to put into it each year, which offers some flexibility.