How small business owners can address retirement savings gap

An interview with Don McDonough, regional executive at Merrill Edge. Merrill Edge, part of Bank of America Merrill Lynch, offers investment services for mass affluent and small business clients online and via financial centers across the Chicago area.

Q: How are small business owners responding to the national retirement savings crisis?

A: First off, the retirement savings crisis is real - more than one in five Chicagoans cite the need to win the lottery to reach financial goals in retirement and 43 percent are saving less than 10 percent of their salary, according to a recent study by Merrill Edge. The risk to small business owners may be more acute given that earnings often are plowed back into the business for growth. Sadly, the idea of diverting money to a retirement account becomes a catch 22: either spur business growth for today or ensure retirement security for the future. It's a serious dilemma small business owners need to address directly and frankly.

Q: What should small business owners be doing to address this dilemma?

A: Over the long-term, a plan must be in place to address retirement security since deferring the question may no longer be an option. Many states - Illinois included - are moving toward state-sponsored retirement plans requiring employers to provide retirement plans to their employees. Fortunately, there are many retirement plan choices that address specific operating needs including SEP IRAs, SIMPLE IRAs, Self-Employed 401(k) plans and traditional 401(k) plans. Choosing the right plan depends on many circumstances including whether a small-business owner has common law employees, wants employees to contribute their own money and/or favors maximum contributions or simple administration. The process is less daunting than one would imagine but the decision should be made in consultation with tax and financial experts.

Q: In your experience, is there a consistent mistake small business-owners make?

A: Given the time, energy and commitment a small business requires, it's not unusual that family finances and investments get short shrift. In ether instance, goal setting is key.

For families the process can be as simple as making a list of financial concerns (e.g., "can I afford to send my child to private school"); listing out expenses (current and anticipated); identifying longer-term goals (e.g., purchasing a summer home) and continuously monitoring and updating them. Avoiding making big changes all at once and guarding against a "Keeping up with the Joneses" mentality will better ensure goals are attained with little of the frustration and backsliding associated with creating a habit, especially one that involves family finances and investments.

In the end, the question should not be 'can I achieve a higher return than last year?' but 'am I reaching my life goals efficiently?"

Q: Do you have any insight about keeping a business within the family?

A: One of the most important things a family business owner can do is have regular family conversations. Ideally, conversations will lead to the creation of a family credo or family mission statement, an outcome that prompts input from everyone involved, dialogue about values and visioning of the future to name a few. Crucially, the prospect for surprise and discord among a family becomes less real as issues are worked out over a longer period of time instead of when it may be too late.

Q: What can be done to prepare the next generation for assuming ownership of a family business?

A: One of the most simple, effective and cost free actions is creating an ethical will. The values that shaped and fueled business growth and wealth creation are critical - and often overlooked. Without an appreciation of the work and wisdom that went into a business that created wealth, heirs may have a harder time holding onto or building on a business that shapes a legacy for future generations. That's where creating an ethical will can be valuable. Often no more than one or two pages, an ethical will allows you to share your vision for your family for generations to come. It can also go a long way toward instilling the values you expect your heirs to live by while encouraging them to consider how they contribute to their community and the world.