Posts tagged Retirement
Understanding the power of time and compound interest shows the benefits of starting your retirement savings early. Compound interest means that the interest on your investments will earn interest as well, thus allowing you to build a bigger nest egg.
Albert Einstein once said, “Compounding interest is the most powerful force in the universe.”
Who are we to argue with the man who gave us E=mc2?
Let’s look at an example of delaying retirement savings: Four individuals each desires to become a millionaire at age 65, but until now had no plan or knowledge of what would be needed to attain their goal.
Name, Age, Starting Balance, Monthly amount needed for $1,000,000 at age 65*
Katie 20: Starting Balance $0 Needed Monthly Contribution:$363
Pat 30: Starting Balance $10,000 Needed Monthly Contribution: $648
Susan 40: Starting Balance $20,000 Needed Monthly Contribution: $1319
Alex 50:Starting Balance $50,000Needed Monthly Contribution: $3026
*Assuming 6 percent
You have heard the saying “pay no or pay later.” Everything costs more down the road, but most especially your retirement! Time can be your friend or your worst enemy. A happy and secure retirement requires making time your friend.
10. Great hedge against future taxation.
9. Fund during peak earning years before retirement and be done.
8. It can never go down in value. Once dividend is paid, it cannot be taken away unlike the stock market.
7. It helps solve the asset allocation/protection problem.
6. High rate of return as a taxable equivalent yield.
5. Protects from disability during the critical working/earning years of the accumulation phase.
4. Can serve as your emergency reserves.
3. Leaves clients without “Buyer’s Remorse.”
2. At mortality even after a lifetime of income, it provides your spouse/loved ones a tax free death benefit which replaces the initial investment.
1. It is a permission slip to spend down all other assets.
There’s a fatal flaw in the retirement of many small business owners: After pouring a lifetime of blood, sweat & tears, time and capital into building the business, their rough-sketch strategy is to sell out someday for a ton of money, then settle back and enjoy a financially secure retirement. Many business owners are so sure this will happen that they don’t bother to make any other retirement plans.
Who is this “person” who, at just the right moment, is going to show up with cash in hand to buy the company? Not too mention pay a fair price? For thousands of small business owners each year, no one steps forward. Perhaps the business is too specialized or is tied too closely to the owner’s unique personality and skills. Or perhaps possible buyers equate retirement sale with fire sale and make ridiculous low-ball offers. Whatever the reason, many owners find that their company has suddenly become a white elephant that nobody wants.
One Possible Solution
Groom your own replacement, someone who will buy your company when you’re ready to retire. Maybe this person is a current co-owner (but be careful if he or she is about the same age as you, who will be counting on retiring around the same time.) Or it could be a son or daughter active in the business, or a younger key employee.
Business Owners Who Successfully Groom Their Own Replacements Leave Nothing to Chance
They realize that there is no room for error at the point of retirement. Here are some examples of steps they might take:
- They are cautious. They make sure their heir apparent is the right person in terms of temperament, personality, competence and personal goals.
- They set up a probation period so they can terminate the relationship if they find this person simply will not work out. During that period, they keep everything informal, strictly verbal. At the same time, even when they go to a formal agreement, they make sure it contains a termination provision.
- They fashion golden handcuffs and incentives to ensure that their replacement stays until the baton is passed. An ambitious successor needs and deserves gradually increasing authority and benefits. Options include deferred compensation or the opportunity to acquire partial ownership prior to their retirement. This provides both parties with something to win by sticking to the agreement and something to lose if it falls apart.
- They put it in writing, along with the help of their attorney—locking in duties and rights, and spelling out all details and caveats, including how to establish the final valuation of the business. This formal buy/sell agreement protects everybody.
- They build in a funding mechanism. This is crucial. No matter how good the terms of the buy/sell agreement, it will be worthless if the money is not there when needed to carry out the plan. Under one option, the successor may be able to purchase the company from ongoing profits. Other options include setting up a sinking fund or allowing the successor to simply borrow the money. These options may work but they leave much to chance. Instead, consider a funding vehicle that protects your family in the event of your disability or premature death, such as life and disability income insurance.
- They have a back-up plan. As a business owner, you know that very few things go exactly as planned. What if your business hits tough times or your successor dies, becomes disabled, or—all to common—leaves because of a personality conflict? Or what if there simply is no heir apparent waiting in the wings? Sometimes, it’s simply best to dismantle the business.
Whether or not you have a possible successor for your company, you should begin mapping out your retirement strategy today. Your insurance professional or your independent professional advisors can help you develop this kind of business strategy.