Retirement, Recessions and Older Small Business Owners

Tami Gurley-Calvez, Kandice Kapinos, and Donald Bruce, December 2012

How well are older small business owners prepared for retirement? How well do they fare during recessions compared to employees in the same age group? This study uses publicly available panel data to examine the retirement savings decisions of small business owners nearing retirement age, with particular emphasis on the role of economic downturns. Understanding whether small business ownership influences individuals’ ability to weather recessionary periods with respect to their retirement planning will inform policymakers as well. If older small business owners’ retirement savings are affected to a great degree during recessions, there might be a need for policy interventions to address this gap. The researchers explore a variety of factors that might lead to differences in retirement plan preparation and savings behavior.

Overall Findings

The researchers’ key findings are that small business owners nearing retirement (over age 50) are significantly less likely than employees to have pension or retirement plans, including 401(k)s, on their current job. This finding occurs regardless of the extent of self-employment in an individual’s career (whether part-time, full-time or for a short or long period). At the same time, small business owners tend to have significantly greater IRA and Keogh plan savings than employees, even after controlling for key sociodemographic characteristics. A third key finding is that small business owners and employees have similar retirement savings behavior during recessions; the probability of having a pension and the value of IRA/Keogh accounts are largely stable through recessions. Other findings include:

  • Older small business owners invest their retirement savings similarly to older employees. They do not seem to be more likely to choose equities over bonds.
  • Older small business owners do not appear to start to save for retirement sooner than employees, but the researchers were only able to examine this for one year.
  • Older small business owners tend to report thinking about retirement less frequently than employees.
  • The small business owner has a significantly later expected retirement age than an employee. In fact, the small business owner may be less likely to retire all together. Specifically, small business owners in 2010 reported that they would retire on average at age 72.6, while the expected retirement age among employees was 68.4.
  • Finally, small business owners over age 50 exhibit greater financial knowledge about concepts such as inflation, interest calculations, and general financial literacy than employees. However, in some models these differences are quite small and not statistically significant, but still suggestive.
  • These findings add support in favor of small business assistance programs as a way for individuals to gain valuable financial skills. It is possible that facilitating small business ownership could lead to greater retirement preparation and greater retirement income security.