Retirement: What's That?
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When your employed friends talk about retirement, do you have a hard time relating? When you think about growing older, do you picture yourself happily still working? As an entrepreneur, you're not alone.
After spending years building businesses they're passionate about, many entrepreneurs say they'll never stop working. "I may be running a car wash and not a financial software company [after reaching retirement age], but I'll be doing something," says Mark Hoffman, president of LifeYield and a serial entrepreneur. "Most of us see retirement as working less hard and having less stress. But because it's difficult to hedge inflation, I always plan to have something that brings in cash."
In addition to the financial rational for continuing to work, some entrepreneurs believe their quality of life and health would be diminished if they stopped doing the work they love. "Life is growth," says Francois Gadenne, a serial entrepreneur and executive director of the Retirement Income Industry Association, who says he plans to always stay productive. "When growth stops, life withers away."
But even if you plan to never completely stop working, a backup plan can be important. "Most entrepreneurs don't plan on retiring but when they reach a certain time in their lives, they want options," says Robert Cadena, Jr., of Retirement Solutions in San Antonio, Texas. "I tell all my business owner [clients] not to put all their eggs in one basket, i.e., their business."
The Retirement-Planning Conundrum
In some ways, planning and saving for retirement runs contrary to the typical characteristics of successful entrepreneurs. For instance, does planning for retirement make you a pessimist who assumes your business will never grow big enough to be sold for millions of dollars, making retirement savings irrelevant? Does relying on a retirement nest egg mean you've lost the entrepreneurial confidence you once had?
Not according to Gadenne. "It's nice to do the high-wire act, but would you be interested in buying a net?" he says.
"It's great if you're that positive person who loves what you're doing and can't imagine ever not working," says Marcia Mantell, owner of Mantell Retirement Consulting in Needham, Mass. "Keep marching down that path. But still, there's got to be a plan B, which is retirement savings. You don't know what's going to happen. It might not be you; you might stay healthy but maybe the market changes and your business is no longer viable. The market doesn't always cooperate with your dreams."
While staying busy late into your golden years may be ideal, experts say the wisest entrepreneurs will give themselves another option. "The entrepreneurs who say they're never going to retire are usually on two tracks," says Stephen Dobrow, president of Burlingame, Calif.-based Primark Benefits. "There are those who want to work because they always have and they want the mental activity. And there are those who have to work because they didn't set things up so that they could accumulate a large amount of cash to retire."
Planning That Works
Three-quarters of the entrepreneurs Dobrow works with wait until they're five or 10 years away from retirement to begin planning for it aggressively. In many cases, business owners are too busy with their businesses to think about retirement planning, or they spend years investing any extra money back into their businesses rather than into retirement funds. While an early start can yield greater returns, experts say it's better to start saving late than to never save at all.
And because every entrepreneur and every business is different, the right plan for each situation varies. Retirement planning experts recommend considering some of the following choices, and possibly pursuing more than one.
- Zero coupon bonds
A rarely-discussed retirement option, zero coupon bonds are ideal for entrepreneurs, Gadenne says. Rather than receiving interest coupons twice a year as with regular bonds, zero coupon bonds pay no interest until maturity. Investors buy the bonds at deep discounts and at maturity they receive a lump sum equaling the initial investment plus the interest over the life of the bond. While zero coupon bonds usually don't mature for 10 or 15 years after the purchase, it allows you to have an income floor, Gadenne says. "You know there's a pile of money coming in that will allow you to live for [awhile]."
- Cash-balance pension plans
Another little-known option for retirement planning, cash-balance pension plans allow high-earning entrepreneurs to avoid some taxes while providing an extra benefit to their employees. "Business owners call me all the time saying they've put everything they have into their business and they're still making money even in the recession, but they are getting killed with taxes," Dobrow says. For these business owners, he designs a cash balance pension plan, which includes a component for helping employees save, as with a 401(k), but allows entrepreneurs to invest much more pretax income than a 401(k). For instance, if an owner would normally pay $300,000 per year in taxes, he can put that amount into a cash balance plan; about $240,000 could go into the owner's account and the rest could go to employees' accounts.
"It's good for the government because they'll eventually get the taxes anyway, it's good for the owner because he builds a good retirement, and it's good for employees because they're getting a good contribution from the owner that would normally go to pay his taxes," Dobrow says. "It's the best-kept secret in retirement planning. Even CPAs don't know about it."
- Business valuation, design or transfer
Many business owners assume their business will be their retirement plan, says Stephen Mitchell, a consultant and chief operating officer of the Retirement Income Industry Association. While that plan doesn't work out for many entrepreneurs, some are able to build their businesses and sell them to the highest bidder, a plan that can result in much lower tax rates. For instance, Hoffman, who plans to build his company for five to 10 years and then sell it, owns stock in his company and "when the purchase occurs, I'll only have to pay capital gains tax on the stock [15 percent] as opposed to regular income tax [sometimes up to 50 percent]."
Others set up the business so it continues to generate cash flow with minimal management required, Mitchell says, citing a friend who built a commercial real estate business that now continues to provide him with an income during retirement through rental fees.
Some business owners also transfer their companies to family members, who are able to pay the original owner a salary for life. However, Dobrow says believing that "my kids will take over my business successfully and be able to pay me a salary" is a myth that often proves to be false.
- Individual Retirement Accounts
While IRAs and Roth IRAs are available to entrepreneurs just as they are to anyone else, Mantell says the Simplified Employee Pension plan, known as the SEP-IRA or the Simple IRA, is "hands down, by far the best investment product for any self-employed individual." The exceptions are those entrepreneurs who have many employees, because if the business owner makes contributions for himself, he must make contributions for everyone in the company. For solo entrepreneurs or those with just a few employees, the SEP-IRA is "completely flexible and free to set up if you go through a retail channel," Mantell says. This year, entrepreneurs can save up to $49,000 in a SEP-IRA. To find a financial advisor who can set up the plan, Mantell recommends the Financial Planning Association or the National Association of Personal Financial Advisors.
- 401(k) plans
For entrepreneurs who have very steady, quite high revenue streams, the Self-Employed 401(k), also known as the Solo K, is a good option for retirement planning. "You can sock away more than you can with a SEP-IRA, but it's a qualified plan so you have to contribute the same amount every year and you have to have a very rigorous audit trail," Mantell says.
Nancy Mann Jackson is a freelance writer who writes frequently about small business issues. Reach her at www.nancyjackson.com.