Don’t Make This Common Entrepreneurial Mistake—Not Saving for Retirement
Here’s how to fix that now—however small your business or modest your income. It especially pays off to start sooner rather than later, but anytime is a better time than never.
The future has a way of creeping up, and before you know it, you’re at retirement age. Are you prepared financially to enjoy a secure retirement with the lifestyle you want? Social Security benefits alone won’t do it. The sale of your business may not be the answer, either, because you never know if it will bring the return in the future that you envision now. Bottom line: Every business owner needs to save for retirement.
More than a third of small business owners report having no retirement savings. Many likely used what savings they had to weather the pandemic, but most simply haven’t saved. Don’t be those people. Despite the budget constraints of running a small business, there are easy ways for every dance business owner to put aside money for retirement—while saving on taxes, too.
The big incentive for starting to save now is time. The sooner you start to set aside funds for retirement, the greater your retirement nest egg will be. That’s because of the magic of compounding. Basically, you earn interest (or a rate of return) on your investment and also on the interest that gets added to the pot along the way. So, as each year goes by, you’re earning interest or a rate of return on an ever-increasing pool of money. It’s what makes even small investments turn into big nest eggs, given enough time.
A concept called the “rule of 72” will tell you how long it takes to double your money.
Years to double money = 72 divided by the rate of return or interest rate
For example, if you put retirement savings into an interest-bearing CD and earn just 6 percent, your money will double in 12 years; it will quadruple in 24 years. As interest rates rise, the number of years it takes to double your money falls. So, if you can earn 10 percent, it will only take 7.2 years for your money to double.
A Dramatic Example of How Time Is Your Best Friend When It Comes to Retirement Savings
Say you start to save at age 25 and add $6,000 a year to an IRA for just 10 years, then stop. By age 35, you’ll have accumulated nearly $89,000 (assuming a 7 percent rate of return)—your $60,000 contributions plus earnings of nearly $30,000. And if you merely hold that in your IRA until you’re 65 (you don’t add any more money but just let your money work for you), you can have a retirement savings pot of about $677,000! On the other hand, if you start those same contributions at 55, you’ll have accumulated just $89,000 by 65—for the same investment. (Use this IRA calculator from AARP to determine how much your contributions can earn over the period of time you select.)
If you put your retirement savings into equities, such as stocks and mutual funds, the value of your holdings also benefits from the length of time it has to grow. Yes, the stock market goes down from time to time. But with a long investment horizon, you’re sure to come out ahead. Twenty years ago, the Dow was at about 8,300. Ten years ago, the Dow was at about 12,900. Today, it’s about 30,000. And if you have dividend-paying investments and reinvest the dividends, your portfolio growth is even greater.
The Bottom Line
Begin now and save regularly, even if you start out with a modest monthly contribution. And even if you are older, it’s never too late to start to save. You may not be able to create as big a nest egg, but even a small one is better than none.
Read “All the Basics on Getting Started With Your Retirement Saving” for a look at all the different savings vehicles—IRAs, 401(K)s and so on—as well as deadlines to get started and tax details.
Barbara Weltman, an attorney and small-business expert, is the author of J.K. Lasser’s Small Business Taxes 2022: Your Complete Guide to a Better Bottom Line, and publisher of “Idea of the Day” at bigideasforsmallbusiness.com.