Most of us have saved some money, small amounts when young, more as we get older. The big goal is to prepare for retirement and to have access to funds along the way. Historically, our local bank provided savings accounts that paid interest, a share of the bank’s earnings, in exchange for the use of our money. Unfortunately, in recent years interest rates have been so low on such deposits that interest payments have become an ineffective way to grow savings. This has turned us into financial markets, such as the 401(k) which allows investing our savings in stocks, bonds, and other assets.
There is one group of citizens for whom this is not so much the case – the small business owner. Most small businesses get their start using their savings along with the help of friends and relatives. In a study of about 3,000 new business starts (18 months old or less), 75% of the owners used personal savings to start the firm, one-quarter of them financed 100% of the start with their savings.[1] That’s a significant, personal investment! Thirty percent received funds from friends and relatives, and 40% borrowed money from the banks.
In an NFIB study of its member firms, 42% of small business owners with less than 250 employees planned to sell their firms before or at retirement, turning their very illiquid asset into a source of retirement finance.[2] Another 29% planned to pass the business on to heirs and 22% have no plan to close or sell, probably expecting to continue to have a share of the business earnings.
The Covid-19 containment policies have seriously depressed the economy. Unemployment rates have hit record-high levels, but so has the stock market. Consumers who saw their financial investments lose 20 to 30% of their values over the past few months have now seen that value restored as the stock market hits new highs.
Unfortunately, that is not true for the thousands of small business owners who had invested their life savings not in stocks, but in their business operations that produced goods and services and provided millions of jobs for others.
Not directly related to asset values and retirement, it should be noted that most small businesses create jobs, jobs that are lost when many had to shut down. Over half of these firms provided a job for 10 or more workers, jobs lost at least temporarily, some permanently. Some of these businesses will re-start, others will shut their doors for good. The health crisis will certainly alter the small business sector and the prospect of retirement for many.
Article Credit Forbes