Small Business; Big Retirement by Paulie Sabol

If I am to be a retiree it's up to me

Yesterday I was on a phone conference with Paul Zane Pilzer and he echoed the warnings from Mr. Alan Greenspan over the need to ensure your own retirement.

Paul proposed a future for Social Security that I will be certain to blog about another time. It was rather obvious; however, coming from a person who accurately predicted the S&L crisis to the day, I pay close attention to him being the source for these predictions.

The trouble with retirement is you never get a day off...

Most investors and business owners know that all investing involves risk. Consequently, many people focus on the risks involved in making the best retirement account decisions. However, while a slew of investment risks exist, the greatest, single retirement risk facing every business owner and investor is—outliving your money.

Since we're living longer, government retirement subsidy is dwindling, and there's no days off once you retire; small business owners need a better way. By far the best retirement offence is starting a defined benefits plans.

Defined benefits plans differ from other qualified retirement plans by paying a guaranteed annual benefit like an annuity.

These pensions, which have lost much popularity to 401(k) and other defined contribution plans, can offer as much as $160,000 annual income for life (increased from $140K in 2002).

There are four major benefits to using a defined benefits (412(i)) plan

• You can play agressive retirement catch-up.

Specifically, contributions can greatly exceed the $40,000 limit with the most agressive defined contribution plans (many are much less). By greatly exceed, we're talking even hundreds of thousands in a year.

• You and your business retire with Uncle Sam's help.

Contributions are made by the business yet are not income (and thus not taxable income) to the recipient. Furthermore, the employing business may deduct the expense of the contribution. Naturally, any meaningful growth of the value of the annuity or insurance investment is tax deferred. Finally, the real gem of this program, contributions are allowed even if it causes the contributing company to show a loss (check with your accountant).

• You protect your assets

Contributions and growth are protected from creditors (personal and corporate).

• You have amazing options with potential estate planning strategy.

Maxed plans can be converted to a traditional IRA and made into a Stretch IRA (where you name beneficiaries for your IRA at the time of death) or converted from a traditional to a ROTH requiring no withdrawal of funds.

There are some who start their retirement
long before they stop working

While the above quote may be tongue-in-cheek about people who seem to quit working long before they've stopped being employed, I suggest a different view. There are some who start saving for their retirement long before they need it. However, many entrepeneurs sacrifice and skimp for a number of years in order to enjoy several windfall years later in their business.

So here's a "Financial Independence Strategy" for the making it business owner.

Ensure a predictable period of business win fall, and make very large contributions for 5-10 years. Wait for the plan to max out, and then convert the plan once it has reached a maximum benefit. Remember, these contributions reduce your business' taxable income.

When you convert to a self-directed IRA, you have a private bank for real estate investment, franchise purchases (not owner managed or employed franchises or you may be enetering into a prohibited transactions), private placements, or stock option positions.

Consider, as part of your estate planning, converting to a stretch IRA. This will allow you to gift annual payments to a group of heirs (or a single one) based on the highest age among the beneficiaries.

"Retirement killed more people than hard work ever did"
Malcolm S. Forbes

Peter Gellman at Palmer-Stone Group is very safe by Forbes' standar. His work and help were essential to my understanding of the stretch IRA strategy. Naturally, any errors in this article are painfully accepted as my own while anything I have right, I share the credit with him joyously.

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