By Paul Post
John Shartrand helps clients contemplating retirement prepare for their own personal Fourth of July or Financial Independence Day.
Deciding when to leave is never easy, especially for business owners during uncertain economic times.
“As we deal with a huge amount of money in motion and supply chain challenges creating rates of inflation we have not experienced since the 1970s, the question you might be asking is, ‘How can I possibly retire in 2023?’ ” said Shartrand, chief investment officer at CAP COM Financial Services. “If you are just starting to think about retiring now, we may tell you it’s not the right time. But if you have been planning to retire, we are picking a date.”
Steve Bouchey, president and CEO of Bouchey Financial Group, said there two things every business person needs to do. “One: fully fund a pension plan, somehow, some way because retirement depends on their ability to save enough money to be prepared. The other thing is having disability insurance because if you become disabled who’s going to pay the bills? Bills will still come in.”
There are three main concepts and strategies to consider, Shartrand said.
First, as business professionals or owners, clients are urged to target their Financial Independence Day, even if they plan to stay on to help the next generation. “We develop an income plan together,” Shartrand said. “We work with our clients to transition from balance sheet-focused to income statement-focused.”
Next, defense and controllables are considered.
“We strengthen our balance sheet by paying down debt and accumulating safe investments,” he said. “We expect a bear market in retirement, so we plan. You may be in a position when you retire where withdrawing from your investments may not be necessary.”
Lastly, prudent asset allocation is used to develop investment strategies designed for retirement. “We should treat our investments like an individual pension fund,” Shartrand said. “Unlike a pension check, we must generate the pension check from the assets you have accumulated in your investments and/or investments in your business.”
He said high inflation with volatility is a person’s friend during the accumulation phase of retirement planning. “Time and volatility give you an opportunity to accumulate assets and investment at various prices and the time may allow them to bounce back and grow over time.”
But inflation and volatility is a foe during a retiree’s income phase.
“As we position our assets to produce a check we want stability,” Shartrand said. “Volatility has a direct impact on the amount of income we can draw now and how long our check will last. It’s called sequence of return risk. High inflation over a long retirement erodes your stand of living in retirement. Think about your property taxes 25 years ago versus today.”
“Ultimately, you need to build a plan and a model with financial independence in mind, knowing you will face sequence of return and longevity risk,” he said.
Bouchey said, “the sooner you get started the better off you are. If you want to become a millionaire at age 65, if you’re 30 years old, you only have to put away about $260 per month. That’s earning 10 percent a year, year in and year out. If you wait until 50, you have to put away bout $2,500 per month. So the sooner you get started the better.”
For whatever reason, some people feel they can’t afford putting money into a retirement plan. “But the simplest way to look at it is—make believe you get a pink slip today at work,” Bouchey said. “You’re devastated. No job, no income. Then tomorrow they hire you back at 90 percent of your salary. You’ll jump at taking that job. It’s the same as forcing yourself to put 10-15 percent into a retirement plan.”
Setting up a retirement fund is quite easy for self-employed business owners with no employees, using a Simplified Employee Pension plan or 401K Sole Proprietor Plan.
“You can put over $50,000 away that gets taken off your taxable income,” Bouchey said. “With a Simplified Employee Pension you can contribute up to 25 percent of net earnings from self-employment up to a maximum of $66,000.”
This can be done at just about any financial institution from commercial banks to investment firms.
Self-employed, one-person business owners that do a great deal of cash transactions should be especially prudent about setting up a retirement plan, Bouchey said.
“Cash may be king, but when it comes to retirement plans and Social Security you need to have reported income,” Bouchey said.
Business owners with employees may still set up pension plans, but workers must also be taken into consideration. The most popular plans are those in which the employer matches a certain percent of money as an incentive for workers to put money away.
“You can’t just put money away for yourself without offering to put money away for your employees,” Bouchey said.
One of the most important decisions retiring business owners have to make is whether they plan to cease operations, sell the firm or stay on as a consultant. If selling, do you want a large lump-sum payment or have it spread out?
“Spreading it over time is usually better for the tax side of things,” said Cory Laird, a certified financial planner at Saratoga Springs-based Minich MacGregor Wealth Management. “Because of how our tax system works, if you get a big lump sum, typically, it can put you into higher tax brackets, making the income more and more taxed at higher and higher rates. Federal capital gain tax rates, for example, can go from 0 to 15, to as high as 23.8 percent just at federal levels.
“Plus, New York treats capital gains as ordinary income, which might be 4-8 percent higher. If we are talking about ordinary income tax rates, they are even higher than capital gain rates,” he said.
“On the other hand, to delay receiving the entire payout on your business, you increase the risk that the buyer doesn’t pay all that is due, for one reason or another. For example, you might lose three years worth of payments if they go out of business. So it’s really a balance between trying to save on taxes, and do you trust whoever’s buying the business. These two risks can compete with each other.”
Laird said some owners want to stay involved with their business after selling it. “It’s your baby, your parting ways, but you also want it to succeed. You know the business better than anybody else, which can help smooth the transition.”
But this could reduce the amount of Social Security money a person gets.
Everyone’s situation is different, but planning ahead and making well-informed decisions is vital in all cases.