As a partner at LJCooper Wealth Advisors, a financial planning firm that launched in Utah in 2000, Craig M. Porter Rollins has clocked many hours advising small business owners on all matters related to personal finance. Chief among his specialties is retirement planning. For small business owners, this can be anything from setting up IRAs or 401(k)s to repositioning an owner’s assets after selling a company. Recently, business writer Iris Dorbian caught up with Rollins to discuss the most common mistakes small business owners make when it comes to retirement planning. He also offers his opinion on the eternally modern predicament faced by small business owners: Can you really save in a bad economy?
ID: What are the most common mistakes small biz owners make when it comes to planning their retirement?
CR: They don’t. The most common and prolific mistake that we see small business owners make is that every year they pump money back into their business. They take excess of profits, if they have any, and they put it all back into the business. They treat their business as their retirement, which is a monumental error because you just don’t know what the economy is going to bring in the future. The last couple of years have been a great example. Getting a small business owner to put away 10 percent or five percent—anything in those first few years of their business running—is very difficult. Unfortunately, if they don’t do it early, the habit sets in and every year they take income coming in from their business and they put it back into their business to make it better and they put nothing aside for retirement. That’s probably the number one mistake we see.
ID: How can they stop this?
CR: We advise our business clients pretty much the same way regardless of what happened the last few years. In fact, if anything, the last few years we’ve said if you had been putting more away for retirement and your business struggled or something happened, you would have a fallback. But now you don’t have that because you haven’t been putting money aside. Another issue we see for most small businesses is they have no emergency fund. Their emergency fund is their personal credit card, not corporate. So mistake number two is no emergency fund for business—we call it a sustainability plan. Most small businesses have no sustainability plan. They’re literally paycheck to paycheck. So we try to get them in the habit of setting something aside for retirement and for a sustainability plan. I don’t care how much it is; it’s about getting them into the habit. Once you get someone into the habit, once they do it several times, they begin to see there’s a benefit long term and it’s easier for them to put more away as time goes by.
CR: I had an individual who approached me seven or eight years ago. The father had a closely held corporation with his three sons and said he needed to do something [about retirement planning]. He said, ‘I don’t have a ton of money. What can I do for a few hundred bucks a month?’ We set them up with a simple IRA plan. It was something very basic for him and his three boys. He passed away a year later, but he and his sons got into the habit of putting something away. There was also an insurance plan in place for the father, which was very beneficial to help transition the business. And in fact he had said, ‘Maybe I should get rid of the insurance plan.’ I said, ‘No way. You can’t afford to do that.’ Now, I didn’t know his health was going to deteriorate. No one did. But I’m grateful that I made him hold onto that life insurance plan because it would have been detrimental to the business, which may have not survived.
So here we are now, eight years later and every one of those boys now has a six-figure retirement plan because of what we did for that company. We actually switched their plan to a full 401(k) because they got into the habit of putting money aside. They also had a sustainability plan. When the market had a downturn, they not only weathered the storm, but they thrived because they could do some things that other companies that were struggling couldn’t do. I think they’re all funding the maximum in their retirement plans today and they started with a couple hundred dollars years ago. That’s a classic example of just start with something, anything, to get into the habit and then you can see the benefit. Those men have also all started education funds for their kids. That’s the perfect scenario—that they listened.
ID: How do you plan for retirement in a recession?
CR: Again, it’s not a question of the dollar amount; it’s the question of starting and maintaining the habit because you’re going to have lean times. Any small business owner out there that thinks they’ve got the end-all-be-all program that’s going to make them millions and bazillions of dollars [is mistaken]. There’s going to be lean times. There’s going to be mistakes; there might be health issues. You just don’t know what the future holds. It’s about getting into the habit—I don’t care if you’re putting 50 bucks away a month. They have got to start that habit. That’s the number one key to success. They’ve got to put money aside regardless of what the business is doing.
ID: Aside from putting money aside, what are some other tips you have for small business owners when it comes to planning retirement accounts?
CR: Being a financial advisor, I have a predisposition for people to get advice. A little bit of qualified advice goes a long way. Business owners who don’t think they can afford an advisor better get one. Get a referral from a friend. Do your homework, but sit down with a financial advisor that has some experience with small business because they can save you so much. I look at the ones that have listened to us versus the ones who haven’t and it’s absolutely vital that they find an advisor that they trust and follow their instructions. Otherwise, they’re gambling with their business.
Disclaimer: The opinions expressed are solely those of the interviewee. As always, you should receive the advice of a qualified retirement plan professional prior to investing in a retirement plan.