(FORTUNE Small Business) – It was a typical response from a small business owner, says financial adviser Bruce Fenton. He asked a client, an antiques dealer from Brimfield, Mass., if he had socked away any money for retirement. The answer? The merchant turned, waved a hand around the shop, and declared, "This is my retirement plan." But as Fenton and others will tell you, only a fool bets his or her future on a business that can become passe in the blink of an eye. "Nobody puts all their money into IBM or Microsoft," says Fenton, president of Atlantic Financial in Wellesley, Mass. "You want diversity and stability."

If you're muttering, "I'll get to it, I'll get to it," you're not alone. Less than half of all businesses with fewer than 100 employees have a retirement plan, according to the latest Bureau of Labor Statistics data. Fluctuating revenues, roller-coaster cash flow, and a young and restless or less- educated employee base account for the procrastination, according to a poll of small business owners taken earlier this year by the Employee Benefits Research Institute, a nonprofit research group in Washington, D.C.

Unfortunately, those without a plan are often unaware of the many options designed specifically for small employers. The two types of savings incentive match plans for employees--both Simple IRAs and Simple 401(k)s--were a mystery to 33% of those polled, even though Congress created the plans three years ago to reduce the administrative burden and costs associated with such plans for firms with fewer than 100 employees. "Most owners are so caught up in day-to-day operations, they do nothing about retirement," says Michael Furois, a financial adviser in Chesterton, Ind. Others wait too long to begin. "A lot of entrepreneurs think they're invincible; they think somehow they'll pull through, like they always do," adds Fenton. The truth is, you have to start saving significant amounts of money now to replace your income when you retire. A 45-year-old who puts away just $6,000 a year for 20 years will have only $385,000 at age 65, assuming the investments grow at an average annual rate of 11%. That's not a paltry sum, but it's probably not enough to replace your current annual income for 20 years or more in retirement.

To maximize your savings, consult with a financial adviser, benefits consultant, or certified public accountant versed in investing and retirement planning. Ultimately, your plan choice will depend on your business' size and cash flow, the age and income of your employees, and the number of years you have until retirement. It will also depend on how much you need to save in taxes. To help you get started we've profiled the most popular options for small business owners: the 401(k) plan, the Simplified Employee Pension Plan (SEP-IRA), the Simple IRA, the paired Keogh, and the Defined Benefit Plan. We've also worked with Morningstar, the mutual funds research firm, to develop model portfolios to help first-time investors navigate the morass of fund options ("Retirement Portfolios," page 92).

401(K)/PROFIT SHARING

The most popular type of retirement plan isn't just for big corporations. If you expect your business to grow and you need to attract top professionals in competitive fields, 401(k)s are essential recruitment tools. With the aid of an experienced adviser, they can be designed to allow a business owner and his employees to save up to $30,000 a year.

How it works: An employer matches tax-deferred employee salary contributions up to $10,500 annually, so participants can salt away almost triple that amount (or 25% of their salary, whichever is less) by combining the plan with profit sharing. Although the employer is not required to contribute, matching dollars encourage participation, which is in your interest: The more employees contribute, the more you can save. That's because total contributions for the highest-paid employees--such as you--are limited by the participation rates of low-paid workers. You can avoid some of these constraints at the expense of a more complex plan by adding a profit-sharing component. Or opt for what is called a safe harbor 401(k), which lets you dispense with nondiscrimination testing (making sure that higher-paid employees aren't allowed to contribute a larger percentage than lower-paid employees) if you agree to match every employee's contribution at a certain minimum level and immediately vest these contributions on behalf of your employees.

Al Cini, 51, owner of Computer Methods Corp., a 30-employee computer consulting firm in Marlton, N.J., typically defers $10,000 of his salary to his 401(k) plan. Like many business owners, he has found that such plans can be constraining since they are designed to benefit employees. So he was able to be creative because his plan had a profit-sharing component. In its simplest form, profit sharing involves distributing a percentage of profits to employees as a percentage of pay. The IRS allows profit-sharing dollars to be allocated in ways that benefit business owners. One way is to calculate the percentage distributed to each employee using what's called Social Security integration. This allows you to contribute a higher percentage of profits to employees who earn more than the Social Security wage base of $76,200. This strategy has helped Cini tremendously. Besides building a larger retirement nest egg, he saves about $20,000 a year in corporate taxes for the $50,000 his firm contributes to the plan.

Where to set up a 401(k): a bank, a mutual fund company, or a third-party administrator such as a regional benefits-consulting firm, which often uses the plans of discount brokers. Beware of hidden fees: Some plans impose stiff penalties--as much as 5% of plan assets--for breaking your commitment.

SEP-IRA

Simplified Employee Pension plans are great for sole proprietors and owners of small firms, since they are nearly headache-free and allow a tremendous amount of savings to be tax-deferred yearly. The business owner establishes an individual retirement account for each employee and funds the account up to 15% of each employee's salary, to a maximum of $24,000. Advantages: For business owners there are no income restrictions to reap the tax benefits as with a traditional IRA. Administrative tasks and costs are minimal; annual filings to the IRS aren't necessary.

How it works: Every employee gets the same contribution, which can vary year to year. Having a bad year? Contribute little or nothing to the plan. Each IRA account can be held wherever the employee chooses, and employees decide how to invest their own funds. Caveat: It's not the best choice if you have any part-time employees you don't want to include, because the definition of eligible employees is so broad that you may wind up making contributions for all your workers whether you want to or not.

Michael Gillis, 43, and David Bikofsky, 44, began a law partnership specializing in business litigation in 1988. Three years later they chose a SEP-IRA because it's simple to administer. There are no limits on how many participants can be in a SEP, but they generally work best for businesses like Gillis and Bikofsky's six-person firm, in part because funding the plan to maximum could cost a larger firm too much. Under SEP-IRA rules, only the employer funds the plan.

Gillis and Bikofsky have been able to contribute close to 15% annually and never less than 10%, Gillis says.

Where to set up a SEP-IRA: Fill out IRS Form 5305-SEP (www.irs.gov) with a certified financial planner, or see a brokerage, mutual fund company, or financial services firm, which may charge minimal annual administrative fees. T. Rowe Price charges $10 for each SEP-IRA mutual fund account but waives the fee when assets in the fund exceed $5,000.

SIMPLE IRA

This individual retirement account allows a small business to establish a retirement program without meeting stringent reporting and nondiscrimination testing requirements. It's great for employers who can't afford to fund the maximum for everyone in the company. As with the SEP-IRA, there is no income threshold in order to save in this plan on a tax-deferred basis.

How it works: The maximum you or your employees can save in a Simple IRA is $12,000 a year, which includes a $6,000 maximum employee contribution. The plans work well for cash-strapped companies because matching rules are flexible: You can match participating employee contributions dollar for dollar, up to 3% of salary or as low as 1% in any two of five consecutive years. Or you can contribute 2% of salary a year to all workers whether or not they are in the plan.

Sue Miller Long, 41, has owned a real estate appraisal firm in Phoenix for 16 years. Last September, Long closed her three-year-old SEP-IRA because she couldn't afford to fund it to the max for her whole firm. Instead, she created a Simple IRA for her six employees, who had requested a retirement plan. She agreed to match 1% of their contributions for the first two years; she'll raise that to 3% in 2001. Because her business is cyclical, Long likes the flexibility of beginning with a modest contribution.

Where to set up a Simple IRA: Complete IRS form 5304-Simple or 5305-Simple, and get advice at a financial service firm--a mutual fund company, a brokerage, or a bank that offers investment services--or through a certified financial planner.

PAIRED KEOGH

Keoghs are qualified retirement plans for the self-employed, where the owner is treated as an employee for tax purposes.

How it works: The self-employed typically establish Keoghs as a profit-sharing plan or a money-purchase plan (otherwise known as a defined benefit plan), but for the maximum in savings they combine the two into one. This paired strategy allows you to contribute 25% of your annual compensation, up to $30,000.

When ML Systems (a subsidiary of Alcoa) closed in 1994, area manager Gerald Helbig started his own business as a lighting contractor, opening Enercon in Sturbridge, Mass. He was 36 and married, with two children, ages 9 and 12. At Alcoa, and at a previous job with GTE, Helbig had participated in 401(k) plans. Now on his own, he wanted to continue growing his savings while minimizing his tax bill, putting as much of his profits as possible into some type of tax-deferred savings plan. He chose a paired Keogh to cut his tax bill to the maximum allowed by law.

Enercon is an S corporation--a company that can be solely operated or have 35 or fewer shareholders that is taxed as a partnership--so all of Helbig's profits flow to him as income for tax purposes. Each year he contributes 10% of profits to his money-purchase plan; he then funds his profit-sharing plan up to another 15% of his annual salary, keeping his total contribution under the maximum $30,000, or 25% of his salary. So far the 42-year-old Helbig, who runs his company alone, has earned enough to fund his plan at the maximum level each year. He has saved $162,000; his hope is to retire comfortably at age 60 with $1 million, with help from another $225,000 saved in retirement accounts from previous employers.

Where to set up a paired Keogh: through a mutual-fund company or a financial-services firm. Helbig determines his contribution level and writes two checks: one to his money-purchase account and a second to his profit-sharing account. Helbig consults with Atlantic Financial to determine where to invest, but he doesn't choose the actual investments.

DEFINED BENEFIT PENSION PLAN

This stodgy stalwart can save your hide if you're in your mid-40s or older and haven't saved much of anything yet.

How it works: Instead of a fixed contribution as in a 401(k) plan, your contributions to a defined benefit plan can vary every year so you can make sure to hit the target benefit. According to the law, that annual number must be capped at 100% of salary or $135,000, whichever is lower.

A defined benefit plan provides tax savings, but if you fund your own plan toward a goal of receiving 100% of your pay at retirement, you must do the same for all employees; the IRS requires that all employees be treated equally. (If employees are mostly younger, lower-paid workers, these restrictions shouldn't be onerous.) You'll need a financial adviser to help you establish a plan, as well as the ongoing services of an actuary, services that add to costs. The actuary determines how much you contribute each year by following complex formulas that take into account your age, number of years to retirement, the future benefit you want to receive, and the assumed rate of return on the plan.

Mike Schlegel, 46, owns a sales and marketing business in Show Low, Ariz., and has been in business since 1973. Three years ago, the business began to grow rapidly. He had established a Simple IRA to begin saving for retirement but converted to a defined benefit plan a year ago in hopes of meeting his goal of retiring by age 55.

Schlegel paid $1,000 to set up the plan. He will continue to pay the same amount annually to administer it. Because he saved little for retirement until recently, he is catching up with annual pretax contributions of about $50,000. These are saving him $15,500 a year on personal federal income taxes. Better yet, he doesn't have to match such large contributions for his two silent partners, since they don't draw a salary and are not part of the plan.

Where to set up a defined benefit plan: You need an expert, so go through a financial-services firm, a certified financial planner, or an employee-benefits adviser.

www.fsb.com Learn how much you need to save for retirement. Use our worksheet at www.fsb.com/retire/.