© 2013 New York Times News Service
When R.?J. Lewis left a corporate job to start his own business in 1999, he knew his bank account would suffer. He gave up a six-figure income and assumed that the first few years of entrepreneurship would be lean.
Still, he did not realize just how much of a toll running a business would take on his personal finances. For four years, Lewis, the founder of eHealthcare Solutions, an online advertising network that is based in Ewing, N.J., and represents health care websites, took home about $20,000 a year and had to deplete his retirement savings account.
“It was draining to watch that savings go down,” he said.
But as soon as he was able, he started saving again. Unfortunately, many business owners never reach that point. One study found that 40 percent of business owners had no retirement savings. There are a lot of reasons saving for retirement is difficult for owners, but perhaps the biggest mistake many make is assuming that they do not need to save - that one day they will sell their businesses and live off the proceeds.
Many businesses simply cannot be sold, and others end up being sold for far less than expected, said Randy Gerber, founder of Gerber LLC, which helps business owners manage their personal finances. And even if a business can be sold, he said, owners often have an unrealistic notion of how much it might be worth. That is why a potential sale should not be an owner’s only plan for retirement.
PLAY IT SAFE
By definition, business owners take a lot of risk in their professional lives because much of their net worth is tied up in one asset, typically as much as 65 to 85 percent, according to Rob Pettit, a high-net-worth planner at TD Wealth.
For this reason, they are often advised to follow two rules with the money they manage to save: invest conservatively and diversify. Following that advice, however, does not come naturally to all business owners. Many are eager to invest in stocks and do not want to consider fixed-income securities.
When Lewis started investing in the stock market, he bought mostly health care and pharmaceutical companies, industries he is exposed to through his business - a common mistake.
“It seemed to make sense for me to invest in health care because I know it so well,” he said. “Most of my business is tied up in that sector.” He eventually realized that it would be wise to change that approach, and he now owns shares in technology, oil and gas and financial companies.
Gerber, whose financial management firm is based in Columbus, Ohio, said he believed that assets that are liquid, have low volatility and generate income were generally an entrepreneur’s best bet. Many of his clients own corporate bonds that can either be sold quickly or held to maturity, and mutual funds that invest in equities and pay dividends. He avoids mutual funds that invest in bonds, he said, because when interest rates rise, they lose value.
CUT YOUR OWN PAY?
When times get tough, many owners stop saving for retirement. They either forgo salary altogether or reduce their pay. That can be a mistake, said Ellie Byrd, founder and chief executive of ForumSherpa, a business based in Atlanta that offers executive leadership and training courses.
Byrd used to run a software training company. In 2000, she stopped taking a salary, and a year later, she found herself $500,000 in debt. With no income, she could not contribute to a savings plan - or pay her bills. When a business struggles, deciding not to pay yourself may seem a natural reaction, but it can obscure larger issues.