The Value of Retirement Planning for Small Business Employees

Author: Siân Killingsworth / 6 Mar 2023 / Personal Finance, Small Business 401k

As a small business owner, it’s imperative that you ensure your employees are prepared for retirement. After all, you care about them and their financial future. These helpful strategies will help ensure that your employees are ready for what comes next.

Why retirement planning is (extra) important for small business employees

Retirement planning is essential for everyone, but especially for employees of small businesses that may not have the deep pockets that a major corporation does—and the sooner they start saving, the better. Many small business employees may not have access to the same retirement benefits as those at larger companies, such as pension plans or stock options, which can make it harder to save.

Additionally, small business employees may be more vulnerable to financial shocks that may arise such as unexpected medical expenses or a job loss. Having a healthy retirement plan can help provide a safety net for these (and many other) unexpected expenses.

Most people significantly underestimate the amount of money they’ll need in retirement and may not save enough to be able to maintain their current lifestyle after retirement. By educating your employees on the importance of retirement planning, you can help them avoid this common pitfall. Future them will thank you.

3 biggest benefits of saving in a 401(k)

These are the top three most compelling reasons for your employees to participate in your small business 401(k) that they need to know now:

High contribution limits. One of the most important benefits of a 401(k) is how much money each individual is permitted to contribute each year. These limits are set by the IRS, and typically increase annually to keep up with inflation. The maximum contribution in 2023 is $22,500 for people under age 50. For those aged 50 and older, the total is $30,000.

Tax savings. Be aware that 401(k) plan contributions can be made with pre-tax dollars, so the more you contribute, the lower your annual taxable income. Even $1,000 contributed can be enough to lower your tax bracket and the percentage of your income paid to the IRS.

Compounding interest. Another big benefit offered by 401(k) plans is compounding interest. This is a saver’s best friend. When you invest in a 401(k), the money you add generates interest. Then the interest itself generates interest (compounding) and can grow rapidly year over year.

How to educate your small business employees on retirement planning

There are a number of ways that you can help your employees learn more and feel confident with their retirement planning:

1. Offer employer-sponsored retirement plans

One of the most effective ways to encourage retirement planning is to offer employer-sponsored retirement plans, such as 401(k)s. These plans allow your employees to contribute pre-tax dollars to a retirement account, which can help reduce their taxable income and increase their retirement savings. Bonus points for offering matching contributions.

2. Provide ongoing education and support

Retirement planning can be complex, and many people may not know where to start. Consider providing ongoing education and support to your employees, such as financial advisors or retirement planning workshops. This can help everyone feel more confident in their retirement planning.

There are lots of online tools you can share with employees – and use yourself– that help them with the logistics of retirement planning. One great tool is a paycheck calculator, which helps people determine how much they can afford to contribute from each paycheck.

There are also 401(k) calculators that can help participants figure out how much they can expect to save over their own expected time horizon. The information these calculators take into account includes age, income, current savings amount, expected age of retirement, probable rate of return, and more.

3. Create a culture of contribution

You can lead by example, provide education, and make it easy for your employees to set up their 401(k)s. By being open and clear about offerings and benefits, more employees are likely to use the investment options you present. You can even take it to the next level by making retirement planning and benefits information part of your small business’s onboarding process.