• Matt Morizio

Do entrepreneurs need retirement accounts?

“I’m 35 and don’t have a retirement account. I think I need to start one.”

Something about my client’s question didn’t sit right with me. And before you say “I know where this is going. You’re a financial advisor. Your stomach probably churns when you see 35 year olds without savings,” hear me out.

I didn’t care about that at all. I worried about the opposite.

I worried about why he thought he needed one.

As a solo entrepreneur, he didn’t have a company sponsored 401k plan to contribute to, so he was looking for advice on what retirement plan was best for him. We talked about SEP’s and 401k’s and Roth 401k’s and Solo 401k’s.

And I know where he was coming from. Like me, he’s a former athlete who earned pennies for a long time chasing a dream after college. We already feel behind when we leave the game and start our next career, and it’s easy to feel like you need to do everything your peers are doing to keep up.

And like many entrepreneurs, he invested nearly his entire savings into his business.

And conventional wisdom says he “needs” to save for retirement.

But I called him 24 hours after our conversation and asked him one question:

“Why do you think you need a retirement account?”

“I don’t, but everyone keeps telling me I’m crazy for not having one.”

There are two HUGE takeaways from his response.

First, if you’re 100% committed and passionate about something, and people call you crazy for not being more like everyone else, you’re onto something.

And second, just because everyone does it doesn’t make it right.

Scenario 1 - start a retirement account

I did the math with him. Let’s say he could save an average of $25,000/year. He won’t be able to do that today, but assuming he continues to grow his business, in 20 years he will be able to save much more than that, so $25k is a reasonable average.

Let’s assume he wants to retire at 65 and averages a 6% return on his investments.

He will have $1,687,270.03 when he reaches 65.

That number is probably too high since the majority of his contributions to his retirement account will be later in his career when he is earning more money, and those investments will have less time to compound, but for simplicity sake, we’ll use this number.

If he lives until he is 95 and that money continues to grow at 6%, assuming he wants to use it all, he can live on roughly $10,000/month in retirement, or about $120,000/year.

Remember the silent killer though, inflation - that $120k will eventually be the equivalent of $50k in today’s dollars, assuming a 3% rate of inflation.

Scenario 2 - Invest back into his business

Instead of opening a retirement account, let’s say he invests every extra penny back into his current business. I’m willing to bet that $20k invested into his company today will pay him WAY more in 30 years than a retirement account will.

The money he uses to grow his business now is way more valuable than having that money tied up in a retirement account.

His company is his retirement account. His company is his investment. Sure, he is putting all his eggs in one basket right now, but remember, the most successful investors today make huge, concentrated bets.

He played sports professionally because he was extremely focused and committed to one goal, and he will be a very successful entrepreneur for the same reason.

So we decided not to set up a retirement account.

Instead, his goal is to grow the heck out of his company, and our future conversations won’t be about his individual retirement account.

They will be about how to manage generational wealth while balancing philanthropic giving, and that’s a much bigger and better problem to have.

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Investment advice offered through Beck Bode, LLC, a fee-only Registered Investment Advisor in the Greater Boston area.