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Behind pension savings? A bad market can be a good time to invest

Small business owners are among the Americans most likely to lag behind when it comes to saving for retirement. Investing back in a business is more often a priority for entrepreneurs with excess money than investing in a long-term tax-deductible pension plan. Covid did not help.

In the midst of the pandemic, many U.S. small business owners stopped or cut back on their retirement savings, according to investment experts and retirement experts, pressured by rising labor and commodity costs, or at worst, facing business closures.

To be sure, the pandemic did not take a toll on all small businesses when it comes to retirement planning. 37 percent of small business owners say they are not sure they are saving enough for retirement, according to a ShareBuilder 401[ads1]k survey of 500 small businesses in March. But there is something down from the 44% who said two years earlier that they were not sure about their pension savings ability.

Some data show that the savings rates for small business owners, at least in margins, mirrored the shock to all Americans during the pandemic. In 2019, the average monthly amount that active participants contributed to their 401 (k) plan with Guideline, a small business retirement platform, was $ 646. It increased to $ 783 in 2021, according to the company. For its part, Vanguard saw the participation rate among small businesses increase to 73% in 2020 from 72% a year earlier, and the deferral rate – the share of an employee’s salary contributed to retirement – increase to 7.3% in 2020, up from 7.1% in 2019.

But these results generally do not reflect the experience of many of the country’s smallest companies – including those in particularly hard-hit industries. Many of these businesses have fallen further behind in their retirement savings targets in recent years for a number of reasons and need a kickstart, according to financial experts. Together with the fact that many owners never saved for retirement, the recent market fluctuations may make it a good time to consider taking away money, or more money, for retirement.

Here are some ideas on how to close the gap.

1. Put at least 10% of the income into retirement if you can

In general, investment experts suggest saving 10% to 15% of your income annually over a 40-year career – just to maintain the same standard of living in retirement, said Stuart Robertson, CEO of ShareBuilder 401k. Nevertheless, the survey in March found that only 38% of the companies surveyed saved 10% or more. Meanwhile, 24% said they did not contribute at the moment.

2. Cut down on the budget and redirect to savings

David Peters, founder and owner of Peters Tax Preparation & Consulting in Richmond, Va., Has told business owners to take a close look at their budgets, keep a close eye on where they spend their money and look for ways to cut back. For example, they may be able to work from home and save on gas or cut unnecessary luxury items. “A smart move would be to cut some of your current spending so you can continue to save for your long-term goals,” he said.

3. Increase investment portfolio risk

Another alternative, for those who are already saving, may be to take on somewhat more investment risk, at the same time as it is relevant to cut expenses. “If you increase the allocation so that you get two or three percentage points higher on a return, and you reduce your expenses by 2% to 3%, and add the power to composition, it can be very powerful for returns,” said Timothy Speiss, tax partner in the Personal Wealth Advisors Group at EisnerAmper LLP in New York.

It may seem like a tough pill to swallow in the midst of the latest market volatility, but for small business owners who have money right now, they may be able to take advantage of some funds that may be underpriced. “People are worried about saving when they see the red numbers appearing every day,” Peters said, but because of market fluctuations, “there may be opportunities they would not otherwise have.”

As Dan Wiener, who runs the independent advisor to Vanguard investors, recently told CNBC’s Bob Pisani, when the S&P 500 falls more than 3.5% in a single day or series of days, they more often than not buy opportunities. Between June 1983 and the end of March 2022, this happened 65 times and gave an average return of 25.6% the following year. “Buying on the big one-day price declines has more often been profitable if you are willing to look just one year,” he said.

4. Make a plan and stick to it

While some small business owners may be concerned that the market will fall further, pension savings professionals said that things tend to level off over time when owners contribute regularly to their retirement. The underlying motivation should not be to choose the best days, but to make a plan to save in the long run and stick to it.

By only contributing regularly, investors get the benefits of the dollar cost average, which means you do not always buy at a high or low level, said Kevin Busque, CEO and co-founder of Guideline. “Once you put it in and forget about it, you do not have to worry about the timing of the market.”

Robertson offers the example of an investor who consistently buys a fund for $ 500, under a high market, a low market and a market in recovery. First, the investor buys five shares for $ 100 each. Then he buys 10 shares for $ 50 each, and finally he buys 6.67 shares for $ 75 each. His total outlay is around $ 1500, and the average share price for the fund is $ 75. Still, the total market value of his 21.67 shares is $ 1625.25, so he is ahead even though he bought some shares at a market high level and some at a low market.

“They can save as much as they want; the important thing is that they do it,” Robertson said.

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