The Risks of the “Pay-Day” Approach to Retirement Planning

One of the primary reasons that we hold small business owners in such high regard in this country is our admiration for their courage.  It takes real courage to strike out on your own and to invest in yourself and your own idea.  I saw this numerous times with my father while I was growing up.  He succeeded as a small business owner of Chevron gas stations and of a community bank.  He has no shortage of confidence in his ability to succeed by working harder and smarter than the competition.  Investing in himself has paid off nicely over time.

However, this inclination to invest in yourself runs some risks.  As detailed in the WSJ article “The Economy Stole My Retirement,” many small business owners have spent decades reinvesting their profits in their businesses—some entirely at the expense of diversifying into other investments.  The plan was to sell their business for a big pay day as they approached retirement.  Then came the Great Recession.

Baby boomers, in many cases, were blindsided by the recession and its effect on their retirement plans, says George Vozikis, director of the Institute for Family Business at California State University in Fresno.

“Boomer entrepreneurs grew up believing in the American dream that you could start a business and eventually sell it for a good return or pass it onto your kids,” adds Aaron Chatterji, associate professor at Duke University’s Fuqua School of Business in Durham, N.C. “Because of the financial crisis and subsequent recession, that is more difficult today.”

Many small business owners are insulted and shocked to find that they can sell their businesses for just a fraction of what they could have prior to the economic malaise of recent years.  Their options are fairly limited at this point; they can keep working and wait it out or they can sell at the discounted prices and adjust to the realities of a more modest retirement.

One piece of advice that my father followed throughout his life, and he instilled in me from an early age, is to save 15% of every dollar you ever earn.  The result of this practice is accumulating sizable financial assets in addition to ownership of the small business.  Following that advice increases the odds of an enjoyable retirement and reduces the stress surrounding the one-time pay day approach to retirement planning.

Source: CNN Money

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