Oops! What about retirement?

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Oops! What about retirement?

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JC Landscaping Services, Inc. had hit their goal. They had achieved success. In 2006 they realized $1.85M in sales and a pre-tax profit of almost 4%. Their customers (200 of them) were happy, their employees seemed happy and all was right with the world.

Jim and Carol are both 51 years old. They started JCLSI by transitioning away from corporate America; sacrificing “security” (yea right), cashing in their retirement 401(k)’s to finance the dream of becoming entrepreneurs. Four long years of 70 hour work weeks and many sleepless nights have resulted in “success.” A celebratory dinner was in order. They toasted their achievements and dreamed of growing their business even bigger until the day came when they would retire. Suddenly, a blank stare erased their smiles. RETIREMENT! How can we retire? Every dollar was invested in the business. Both retirement accounts were long gone. Their business was a success. Jim and Carol were a success. However, they had spent every moment working to improve cash flow, working to improve customer satisfaction, working to improve profitability and their own personal retirement goals were never addressed.

Jim and Carol are not alone. Retirement planning for small business owners is often overlooked. Many owners say “we’ll just sell the business.” Certainly this may be a viable solution, but what is your business worth on the open market? If value is based on a multiple of your cash flows, have you created a cash generating machine (automatic payments for service and maintenance that can be relied upon) or is your business based on word of mouth marketing and acquiring new clients every year?

The good news is retirement planning for small business owners is essentially no different than for the corporate vice president, the dentist or the cashier at the grocery store. The concepts are the same, the vehicles or tools to get there are just a little different.

Step One: Establish your retirement goals. When? Where? How Much? Keep in mind it is estimated that some individuals will need as much as 70-90% of their pre-retirement income to maintain their current lifestyles during retirement.  How you define “retirement “is important. Will you work part-time? How will health care costs be addressed? Will Social Security be available? Be conservative; assume you will need more income than you think.

Step Two: If we know how much we will need and we know when we will start collecting, the next step is to understand the amount to be saved each year between now and that retirement date. Obviously, the longer we have to save the better, however, many of my clients realize that they will have to work a little longer (or put away a lot more dollars) than expected to achieve their goals. Your financial advisor can help you “crunch” the numbers. Again, be conservative with regard to the return on your retirement investments, typically we provide a number of scenarios using returns of 6 – 8 %.

Step Three: Ok, we have a pretty good idea of when we will retire and how much we will need to throw in the corner to fund it. The next step is to develop a plan as to which tools are best suited for your situation. How can I save tax-deferred? Can I save pre-tax? What about my spouse; can he or she participate? Do I have to (or want to) include my employees in the plan? Lots of questions…and here are the options (detailed characteristics are available upon request).

INDIVIDUAL 401(k)’s

Good candidates might be:
• Owner-only or Owner and Spouse only operated businesses.
• Business owners looking for higher contribution limits.
• Business owners seeking maximum profit sharing contributions.
• Business owners seeking tax-free loans.

SPE IRA Plans

Good candidates might be:
• Employers seeking an inexpensive yet easily understood plan for employees.
• Employers who want discretion as to when to make contributions.
• Employers looking to exclude certain employees.
• Employers seeking a Simple Plan, yet would like to contribute more.

SIMPLE IRA

Good candidates might be:
• An employer who wants a retirement plan with minimal costs.
• An employer who wishes to have a plan that allows for employee contributions.
• Self-employed individuals who could defer a larger percentage of their compensation.

INDIVIDUAL DEFINED BENEFIT PLAN

Good candidates might be:
• Small business owners 45 years of age and older with five or fewer employees.
• Small business owners who want a predictable retirement benefit.
• Small business owners seeking a plan that offers the potential for significant benefits in a relatively short period of time.
• Small business owners who want to contribute more than $45k annually to their retirement plan.
• Small business owners who expect to be able to make contributions for a number of years.

Jim and Carol need to review the pros and cons of each plan and get started. Jim and Carol may have waited too long to start saving for their retirement. Don’t be Jim and don’t be Carol…start early, establish goals, plan the work and work the plan.

 

Kent Snyder resides in Clarkston, Michigan and is the President of the Kent Financial Group. He is an experienced retirement advisor, teaches economics at a local university near his home and provides seminars on many financial issues concerning small business.