Business

Behind retirement savings? A bad market can be a good time to invest

Small business owners are among the Americans most likely not to save for retirement. Investing back into a business is often preferred by entrepreneurs with cash surpluses over investing in a long-term tax-deferred retirement plan. Covid did not help.

Amid the pandemic, many US small business owners have stopped or cut back on their retirement savings, according to investment and retirement experts. , due to rising raw material and labor costs, or in the worst case business closure.

To be sure, the pandemic doesn’t affect every small business in terms of retirement plans. Thirty-seven percent of small business owners say they’re not confident they’re saving enough for retirement, according to a March survey by ShareBuilder of 401k of 500 small businesses. But this is down somewhat from 44% who said two years earlier they were not confident in their ability to save for retirement.

Some data suggests that, at least in terms of returns, small business owners’ savings rates reflect an increase for all Americans during the pandemic. In 2019, the average monthly amount that active participants contribute to their 401(k) plans with Guideline, a retirement platform for small businesses, was $646. According to the company, this has grown to $783 in 2021. Vanguard, for its part, sees engagement rates among small businesses increase to 73% in 2020 from 72% a year earlier, and retention rates among small businesses. deferred payment – the share of an employee’s salary contributed to retirement – will increase to 7.3% in 2020, up from 7.1% in 2019.

But these results generally do not reflect the experience of many of the country’s smallest businesses – including those in particularly difficult industries. Many of these businesses have fallen further behind in their retirement savings goals in recent years for a variety of reasons and are in need of a head start, according to financial experts. Coupled with the fact that many owners never save for retirement, recent market fluctuations can be a good time to consider hoarding money or more for retirement.

Here are a few ideas on how to bridge the gap.

1. Put at least 10% of your income into retirement if you can

All in all, investment experts recommend saving 10% to 15% of your annual income over the course of your 40-year career – just to maintain a similar standard of living in retirement, says Stuart Robertson, CEO of ShareBuilder 401k said. However, a March survey found that only 38% of businesses surveyed saved 10% or more. Meanwhile, 24% said they are not currently contributing.

2. Cut your budget and switch to savings

David Peters, founder and owner of Peters Tax Preparation & Consulting in Richmond, Va., told business owners to take a hard look at their budgets, paying attention to where they’re spending their money. and find ways to cut back. For example, they can work from home and save on gas or cut back on unnecessary luxury items. “A smart move is to cut some of your current expenses so you can continue to save for your long-term goals,” he says.

3. Increased portfolio risk

Another option, for those already saving, might be to take on more investment risk, while also cutting back on spending, if appropriate. “If you increase your allocation so you get a two or three percentage point higher rate of return, and you reduce your spending by 2% to 3% and add to the power of compounding, it can very powerful for profitability,” said Timothy Speiss, tax partner in the Personal Wealth Advisory Group at EisnerAmper LLP in New York.

That may seem like a hard pill to swallow amid recent market volatility, but for small business owners who currently have cash on hand, they can take advantage of some that could be undervalued. . “People are scared to save when they see the red numbers showing up every day,” says Peters, but due to market volatility, “there can be opportunities that they wouldn’t have.”

As Dan Wiener, who runs Independent Advisors for Vanguard Investors, recently told CNBC’s Bob Pisani, when the S&P 500 falls more than 3.5% in a single day or series of days, they usually don’t have a buying opportunity. From June 1983 to the end of March 2022, this happened 65 times and generated an average return of 25.6% the following year. “Buying in big single-day drops has yielded returns more often than not if you’re willing to see just one year,” he said.

4. Make a plan and stick to it

While some small business owners may fear the market will fall even further, retirement savings experts say things tend to taper off over time as owners make regular contributions to the fund. their retirement. The basic motivation is not choosing the best days, but making a long-term savings plan and sticking to it.

With just regular contributions, investors get the benefit of dollar-cost averaging, which means you’re not always on time, says Kevin Busque, CEO and co-founder of Guideline. either buy high or low. “When you set it and forget it, you don’t have to worry about timing the market.”

Robertson gives the example of an investor who repeatedly bought a fund for $500, during high market, low market, and market rally. First, the investor buys five shares at $100 each. Then he buys 10 shares at $50 each, and finally, he buys 6.67 shares at $75 each. His total investment is around $1,500 and the average stock price for the fund is $75. However, the total market value for his 21.67 shares is $1625.25, so he is still ahead even though he has bought some shares at the high end of the market and some low in the market.

“They can save any way they want; The important thing is that they are doing it.

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