Retirement Planning: Your Business Plan for Retirement, part two

As I explained in part one of this series, more than just a great business idea makes a business successful. More than simply wanting to strike out on your own, make money as your own boss and create a reality out of a vision, a business, now matter how big or small must have an exit strategy for its creator. It might be a legacy, a business that you would like to see passed on to your heirs. It might be a stepping stone to bigger and better opportunities down the road. But what it should be, all things dreams of success aside, is a bridge to the day when you are no longer working.

To consider retirement at the onset of your company's creation is paramount to that goal. We may say we are working for the glory and the independence, the profits and the satisfaction but in truth, we are working for the payoff.

While the solo 401(k) is designed for the business of one, often times that business will grow to include other people. Product lines expand as your success grows. Contracting out work can be a temporary stopgap yet if you would like to see your business grow to entice more customers and control the quality of your projects, you may need to hire people to work with you in those goals, folks who share your ideals and passions, the same people who, because of their dedication will also be deserving of a piece of the profits generated.

A SEP-IRA can fill those needs nicely. But like all taxable events, the rules need to be followed. SEP-IRA or self-employed pension individual retirement account allows you, the employer of one or more, to share in the profits of your business by making contributions to this type of plan.

It acts just like a traditional IRA would with added feature of shifting contributions. In good years, the plan can allow contributions of up to $49,000 per employee. This contribution is tax deductible for the business and the growth of those funds is tax deferred. In years when the business profits falter or are simply subject to cyclical changes, the contribution can be lowered or eliminated completely.

SEP IRA is a retirement plan designed to benefit self employed individuals and small business owners. Sole proprietorships, S and C corporations, partnerships and LLCs qualify. In those circumstances, the company pays the business owner (you) a W-2 salary. In this situation, the annual SEP IRA contribution can be between 0% to 25% of the owner's W-2 salary up to the SEP IRA contribution limit. The caveat: you must also contribute to your employees the same percentage as was contributed to yours.

The contribution limits are slightly lower for an unincorporated business such as a sole proprietorship, unincorporated partnership or a LLC electing to be taxed as a sole proprietorship. In this instance, annual contributions are made into your SEP IRA account between 0 to 20% of your net adjusted self employment income. Either way, these are hefty savings allowances compared to the limits placed on other types of retirement plans.

One important thing to consider though: having a solo 401(k) as well. because a SEP-IRA is dependent on profits and if you have employees, sharing those profits with them, a solo 401(k), allowable as well alongside the SEP-IRA, gives you another opportunity to put away money for retirement from your income, which may not be reliant on the profits of the business.

Eligible employees must be at least 21 years of age and have worked for you for at least three years of the last five years. SEP-IRAs are easy to set up and cost effective, may have little or no paperwork to file with government and could net you a tax deduction of up to $500 for the first three years of the plan. Plans are administered by the employer through a mutual fund company. generally offering a simple basket of funds from which to choose.

While plan participants cannot borrow against their SEP-IRAs, they may roll them over to another qualified plan. And like all IRAs, are subject to the same withdrawal penalties and restrictions on age.

Next up: The simple IRA and the solo defined benefit plan.

Retirement Planning and Your House as Part of the Plan

I shudder when I read phrases like this: “counted on proceeds from the house sale to boost their retirement income” or “slumping real-estate market in Sarasota, Fla., has damped the longtime retirement dreams”. Both of these comments appeared in an article in yesterday’s Wall Street Journal. It is easy to envision whatever equity you have built up in your home as part of your retirement plan but at the same time, it is foolhardy to think that the roof over head has any economic impact, other than the pressure it puts on your retirement income.



How we view our balance sheet

In the book that this blog is based on, I discuss this phenomenon at length (chapter six, page 55). Few people realize that the equity built up in their home is not what it appears to be.

They think of it as profit. It is not. It doesn’t even qualify as a dividend. Once you purchase a home, you provide numerous years of upkeep, pay the taxes that increase exponentially as the years drift by and you remodel and improve the property. You do this in the hopes of creating a better selling price. But does it return what you assumed it would have had you invested the money elsewhere?

Yes and no. Yes because if the markets cooperate and the prices soar well beyond what, deep in your heart, you know is unreasonable, much like the market provided for us just last year, you perceive the net worth to be high. But the downside of that thinking is harsh. Your house is worth more because the market is up. But so to is everyone’s property. To replace your out-priced home, you will buy another out-priced home and when the markets settle down and prices adjust, you are left with a feeling of loss.

And no. Had you taken all of that cash you invested in making your home more live-able and hopefully more sale-able, and invested it, you would not be worrying today about whether you could retire early or, as some articles of late have wonder, if at all. Granted, this requires you to live as low as possible, put all of your excess cash into another market – securities – also fraught with ups and downs and which is now being referred to as the “lost investment decade”.



So where does that leave us. Focus on your home as a self-sustaining unit. Can you afford to live in the home you are currently in while maintaining it and paying for the taxes and insurance? If the answer is yes, move on to what you have as retirement income beyond those numbers. If the answer is no, consider finding some shelter that qualifies, a place that allows you to live economically. This will not necessarily be where you dream it might be.

If you are still working, look to creating a better nest, a place that is both comfortable and able to accommodate you in your retirement years. This will allow you to stop wondering about whether you can afford retirement allowing you to instead, focus on generating income for those years ahead. Once you remove the “profit” from selling your home and calculated the cost of staying right where you are, you can make a better estimation of what it will take to live in retirement.

If you are close to retirement as the linked article above suggests and your home’s value is revising your dreams, this is the market you hoped would never happen. But it has and coping is what we do best.

Your current home has a cost that is part of your liabilities. To turn it into an asset does not erase it from the liability side of the balance sheet. It simply shifts it to another location with new costs.

Focus on the things you can control. Investing in the stock market is not one of them unfortunately. But not investing is equally dangerous. The total value of your portfolio may be down but that will not be a forever event. The upside of working just a little longer than you had planned: the equities you are buying now are undervalued. This means buying more (shares in your mutual funds) for less and when the market finishes this correction, and it will, you will be far better off than you had imagined.