An important action you need to take periodically as a business owner is to look at why you are working and get a good idea of what the business needs to provide for you over the course of its life. Obviously one of the main things the business should do is provide you with eventual financial independence and ability to retire comfortably or to actively participate in your favorite non-profit or charitable groups without having any concern or need for compensation. This gives you the freedom to donate your time and services when and where you want to. It will likely be expected to provide for the education of your children, or grandchildren if applicable and many other things as well. This is in addition to providing your family a living from year to year.
This is why it is important to work early on at having an overall plan for creating as much income as possible while managing the risks to that income that occur throughout a lifetime. Risks can be very diverse but it is a tragedy to have an unforeseen event destroy a lifetime’s work when planning could have managed or avoided that risk. A good business owner looks for what risks exist and plans how to prevent them from harming or destroying the enterprise. It is important to build a financial house, which is impervious to the hazards it might face in today’s litigious world.
Some things that need to be taken into consideration on retirement are what you will be retiring to. What are your plans? Though your priorities will change as you progress through retirement, money will need to be there for the entirety. How long will you be in retirement? How long will your money have to last? How much will you be able to pass to your heirs? These are complex issues that need to be addressed. Since acquiring wealth doesn’t happen over night, planning needs to be done earlier than many people realize.
The main reason so many retirements don’t go as intended, or start when intended, is because planning for these eventualities gets continually postponed. These are often difficult decisions. Starting this process is usually the hardest part. Accumulation requires time, and while decisions can be changed, the clock can’t be stopped or turned back.
Taking advantage of financial planning strategies and reviewing your situation often will help you access the best opportunities to defer taxes on earnings from the business, as well as on your investments. This will accelerate your progress toward successful retirement. Thus, it is vital to begin working with a qualified planner who can help you move this process forward and not procrastinate.
As an example – You can take advantage of maximizing your 401k plan if you are not doing so already. If you are under age 50 the most you can put in is $15,000 per year, (as of 2006) if over 50 you are allowed to put in more since the IRS realizes you are closer to retirement and need to fund your retirement quickly. So, you can put a maximum of $18,000 per year if you are over 50.
This has the added benefit of lowering your taxable income. The problem with the 401(k) is that the amount you are allowed to put in (and deduct) is too small compared to what really should be set aside each year to build a decent amount for retirement. If you are earning $300,000 or more each year, setting aside $18,000 is not going to build your retirement account nearly fast enough. Even though it’s tax deferred, it will fall well short of being enough to replace the income generated during your working years. There’s another problem with it. It is not a judgment-proof asset. So it is not protected.
But that is pretty much it for pre-tax contributions unless you have an experienced Financial Planner who thoroughly understands tax law and can arrange for a qualified or non-qualified deferred compensation program for you. These programs can be very advantageous and will usually significantly increase the amount of money you are able to set aside for retirement, but the structure must be tested and very clean. It doesn’t make sense to do anything that even remotely hints of avoiding taxes. At the same time it makes a lot of sense to take advantage of any and all legal and proven tax strategies. It is after all your money!
In the present day environment with employer litigations being higher than ever before in history, you should protect your assets or you could lose everything. Employee leasing is your first wall of defense and will protect you against many litigation problems. Malpractice insurance protects you from treatment litigation if you are a health care professional. The reason employee leasing is a smart move is because the employees are not yours; they belong to the leasing company. Another good thing about employee leasing is that some of them will provide 401K and health insurance benefits for you and your staff at a reasonable rate. Having these two benefits will go a long way in attracting good quality staff who will want to stay for a long time.
So, start your retirement plan as soon as possible even if you can only do $15,000 per year. It’s a start and as your income increases start looking into more aggressive yet safe retirement plans.
Bill Halverson is a consultant for PERCSUSA, Inc. a retirement planning and administrative services organization for health care professionals.