Small Business Owners Struggle with Retirement Prep

A recent survey of professional financial advisers, conducted by CNBC and the Financial Planning Association (FPA), shows 42% of advisers believe their small business clients’ biggest financial challenge is developing a retirement plan and business ownership exit strategy. This is distantly followed by managing cash flow, cited as the top client concern by 23% of advisers in the CNBC/FPA survey. Other concerns cited as the top worry among small business owner clients included business tax issues (14%), securing affordable health insurance (6%) and raising working capital (6%).

The CNBC/FPA survey also revealed less than one-third of small business owners have worked with their adviser on a business ownership transition plan. And even among those that did, only one in four small business owners meet with their adviser to review their plan at least quarterly.

CNBC and FPA researchers suggest this lack of focus on retirement and succession planning may prove extremely problematic for the typical small business owner upon retirement. On average about 70% of a small business owners’ personal wealth is invested in their business, with only 30% of wealth invested outside their firms. This suggests many small business owners could come up short on retirement income without an effective strategy for extracting equity from their business ownership stakes.

For many professionals who own a business, selling that business in the wrong environment may not provide the financial means necessary to adequately fund their own retirement. In addition, selling may not be in the business owners’ best interest, depending on a long list of economic factors. Other recent research suggests this is an especially prevalent problem among independent financial advisory business owners, who tend to significantly over-estimate the price they will be able to fetch from a future buyer of their practice (see “An Alternative to Traditional Succession Planning”).

The CNBC/FPA survey highlights the fact that more than half of the respondents (54%) felt their small business owner clients did not have enough protection against unanticipated risks, such as the owner’s sudden disability or death. Just 28% felt their clients were well protected.

Among those small business owners that have retirement plans in place, the most popular vehicles among small business clients polled are profit sharing 401(k)s (54%), followed by SEP IRAs (19%) and SIMPLE IRAs (12%).

The survey also shows financial advisers are using an array of insurance products to mitigate potential risks, including disability insurance (81%), liability insurance (73%), key man insurance (70%), health insurance (63%), property/casualty insurance (56%) and business interruption insurance (37%). Forty-seven percent of advisers who took the survey noted that only 20% of their clients had any succession plan in place to ensure a smooth management transition.

Financial advisers who participated in the CNBC/FPA survey pointed to three key initiatives small business owners and their financial planners should follow in order to secure their financial future. These are diversification, “prepare for the worst,” and “plan for succession.” 

The CNBC/FPA survey was conducted May 12 to June 3 by the Financial Planning Association. It sampled 178 financial advisers nationwide that service small business clients ages 35 to 70. More information about the survey results is available here.