Small Business Owners Face More Retirement Planning Decisions

Lack of 401(k) plans means small business owners and employees must be more self-reliant when it comes to saving for retirement

Marina Del Rey, California, UNITED STATES

MARINA DEL REY, Calif., Dec. 26, 2000 (PRIMEZONE) -- One of the advantages of owning your own business is to work, live and retire the way you want to. But to retire well, owners of small businesses and their employees must plan carefully.

You probably won't be able to retire on your Social Security savings alone. And putting savings into your 401(k) and IRA can help but might not be adequate either. With annual contributions to 401(k) and IRA accounts capped at $10,500 and $2,000 respectively, Americans saving for retirement are forced to look elsewhere for additional savings and investment vehicles.

But small business owners and employees face additional hurdles because they usually do not have access to a 401(k) retirement account. Indeed major corporations offer 401(k) plans as an incentive to lure potential employees. Lack of access to 401(k) plans is a major problem for this country as more people work in small businesses than large corporations. According to the U.S. Small Business Administration, small businesses employ 53% of the private non-farm work force and produce 51% of private gross domestic product.

Small business owners cannot by law set up a 401(k) account to fund their retirement without also offering 401(k) privileges to their employees. Naturally, many small businesses do not have the resources to offer 401(k) plans to every employee.

Given the current rate of inflation, it is not unreasonable to assume the average American couple needs close to a million dollars in retirement savings by the time they retire in 20 or 30 years. And with life expectancy lasting another 20 to 30 years after retirement, the one million figure might even seem inadequate.

(How much do you need to retire? Check out the handy retirement calculators at

In "The Millionaire Next Door," the authors, Thomas Stanley and William Danko, tell us that the greatest threat to wealth is taxation. But tax-deferred retirement accounts, which are sheltered from annual taxes, enable Americans to reach their financial goals. The key to retirement planning stems from the magic of tax-deferred compounding gains. Here is a hypothetical illustration: $10,000 left in a tax-deferred account compounded at a mere 8% over 20 years more than quadruples to $46,609.

One partial solution for small business owners and their employees is to consider annuities as a part of their personal retirement plan. But first, they should fully fund their IRA because it takes pre-tax dollars. Whether you choose an annuity that has a fixed rate or is variable (i.e., with sub-accounts which are diversified and professionally managed), the tax-deferred nature of annuities, much like an IRA account, allows investors to compound annual gains, thus potentially saving for retirement at a faster rate. While the contributions to your annuity account are from after-tax dollars, there is no limit on how much you can put in the account each year.

Online trading and the advent of "no-loads" revolutionized the brokerage and mutual fund industries respectively. Now, a similar revolution is happening in the annuity industry. The cost of distributing annuities online is a fraction of what it costs to do the same offline, cutting out the commission to the "middle person."

But when investing in an annuity consider the following:

-- The 1035 exchange is tax-free. Upgrade to a more competitive, lower cost annuity if you already have an annuity and it is out of its surrender period. On the fixed side, this can mean a higher interest rate with a highly rated company. With variables, this can mean annuities offering a wide selection of sub-accounts with lower fees. This can be done without any tax consequences. Depending on your individual situation, you should consider exchanging to a no-load, no surrender charge annuity.

-- Actively manage your annuity account. Like any other investment fund, you should watch over your annuity, particularly if you invested in a variable annuity. The advent of annuities available online makes this easier than ever.

-- The cost of annuities. Many annuities come with hefty mortality and expense fees, and management fees as well. Consider no-load, no-surrender charge, annuities. Why pay an agent to sell you a product you can buy directly? Cut out the broker/agent and you may potentially have more money for retirement.

-- The bonus annuity is generally misleading. Whether fixed rate or variable, some companies offer annuities with a bonus sales pitch ("14% guaranteed for the first year!") valid only during the first year you hold the annuity. Do not be fooled as these rates are guaranteed to drop after the first year to make up for the difference between the guaranteed and market interest rates.

-- Research the safety rating of the insurance company. An annuity is a contract between you and an insurance company offering a return on your investment. How stable is the insurance company? Moody's, AM Best, and other agencies regularly rate the companies. Each agency will have a different rating system but choose an insurance company with a rating within the top two categories.

For more information about retirement planning, begin by searching the Web. Sites such as,, and offer a wealth of information about IRAs, annuities and other tips about retirement planning. Remember, working in a small company means you are an entrepreneur taking on the responsibility of not only finding opportunities for your current business but also options to secure your future retirement.

About the Annuities Industry

LIMRA International (an independent service that monitors the Insurance Industry) reports that overall annuity sales (combined variable and fixed annuities) grew from $98.5 billion in 1995 to (an estimated) $155 billion in 1999. This represents an average annual growth rate of 12%. Variable annuity sales have shown even greater growth. According to The VARDS Report (an independent service that monitors the variable annuity sales), the variable annuity market has grown from $51 billion in 1995 to $121 billion in 1999, a compound annual growth rate of 19%. Through third quarter 2000, sales for variable annuities reached $105.9 billion, a trend that could make 2000 a record year for variable annuity sales and could push the overall market past $200 billion.

About AnnuityScout: "Annuities Done Right"

AnnuityScout is an independent annuity service for both consumers and the company's business-to-business alliances. Rated by Online Investor Magazine (October 2000) as a top personal finance Web site, is the leading online marketplace for no-load annuities. Representing more than 50 insurance companies, the comprehensive AnnuityScout "supermarket" is designed to offer products direct to those consumers who want more value from their annuities. AnnuityScout's proprietary technological platform enables the company to efficiently service the needs of its business-to-consumer clients and its business-to business alliances both on and offline. The state-of-the-art AnnuityScout call center is staffed with nationally licensed Annuity Specialists. AnnuityScout is a free service of Independent Advantage Financial and Insurance Services, Inc. (IAF). Founded in 1987, IAF has facilitated the purchase of more than $1 billion in annuities and high-end life insurance direct to the consumer through marketing alliances and other endorsements. AnnuityScout is headquartered in Marina Del Rey, California and can be reached at 1 (800) TAX-CUTS (829-2887).

Licensed employees of Independent Advantage Financial and Insurance Services, Inc. dba, are registered representatives of, and securities are sold through, Sentra Securities Corporation, a registered broker-dealer, member NASD/SIPC. Independent Advantage is located at 330 Washington Blvd., Suite 800, Marina Del Rey, CA 90292-5149.

Variable annuities are sold only by prospectus, which contains complete information on charges, expenses and risk factors. Prospective investors may obtain a free prospectus by contacting at 1 (800) TAX CUTS. The prospectus should be read carefully before investing or sending money.

Variable annuities involve investment risks including the possible loss of principal. An investor's contract, when redeemed, may be worth more or less than the original investment amount.

Annuities are designed as long-term retirement savings vehicles. Earnings withdrawn prior to age 59 1/2 may be subject to a 10% federal tax penalty. Individuals should consult their tax advisor for questions regarding their particular situation.