There’s a powerful perspective shift for our retirement lifetime, and it’s time to take notice! Retiring is no longer relaxing and enjoying a couple of years at the end of a successful career. Today retirement can consume 1/3 or more of your life. It can still be relaxing and enjoyable but it takes additional effort and planning to get it to it there.
Think about it this way… at 25-years-old could you have planned what your life looks(ed) like at 45? During those 20 years we see so many changes and are open to opportunities. But when we think about retiring at 65 we approach it with an idea of what we’ll be doing 20 years later when we’re 85-years-old. To make our vision a reality we have to approach differently than we’ve before.
Retirement Today: Starting the Last Business of Your Lifetime
Retirement has shifted, it’s no longer the old pension plan. Now and moving forward, retirement plans are self-funded, often tax deferred “retirement business” plans. With this shift comes the need for a fresh perspective on how we view and plan for retirement.
Deciding to go into business for yourself or retiring takes mental and emotional commitment. Both represent life changing events with substantial risk and tremendous rewards. For some, the leap of faith into business ownership is paralyzing while others have spent years as entrepreneurs. Regardless of whether you’re a first timer or you’re an experienced entrepreneur the finality of entering into a ‘retirement business’ venture is likely both exciting and petrifying.
But it doesn’t need to be scary. You see, your retirement business plan, though it parallel’s a business plan, is not dependent on customers. When properly constructed and executed your ‘retirement business plan’ can effectively mitigate risk. Consider this, of the top ten causes for small business failures those that apply to your ‘retirement business plan’ include: #2 Ran out of cash (29%); #3 Not the right team (23%); #6 No business model (17%); #10 Mistimed (13%). (See All)
Approaching retirement with the attitude and mentality you are creating a ‘retirement business plan’ can supply you with both a quite confidence and peace of mind. The following 4-Step outline is a basic template for creating a successful ‘retirement business.’
#1 Location
Entrepreneurs know the importance of “location, location, location” when it comes to success. The real estate a business operates on, whether physical or virtual, often determines whether it succeeds or fails. When a national coffee chain compares two pieces of property, one in Peoria, Illinois and the other in Houston, Texas the cost/ benefit analysis are substantially different. Both locations may be successful, but not for the same reasons.
The location of your ‘retirement business’ needs a similar cost/benefit analysis. What should you consider? Proximity to friends, family, preferred activities, desire to travel, legacy planning, and taxes to name a few.
#2 Cash Flow
How is your ‘retirement business’ going to be operate next month, next year or 10 to 20 years from now? This is the most important ‘peace of mind’ element. Studies have shown having a steady income in retirement is the #1 factor in a retiree’s happiness. Social Security is a source of monthly income but up to 85% of your benefits can be taxed. Additionally, Social Security alone is unlikely to provide the month to month cash flow necessary to maintain the quality of life you desire. The good news is there are other guaranteed lifetime income options. Many of these options are non-taxable. Remember, just like creating a business plan for any small business there is no one-size-fits-all plan.
Your situation is unique and just like opening a restaurant whether it serves Mexican or Italian food there are similarities but there are also differences to consider. Work with a professional to find the right options for you. Knowing your ‘retirement business’ has a guaranteed lifetime income can relieve a retirement filled with stress.
#3 Tax Responsibilities
Ask any business owner and you’ll likely find one of the most demanding responsibilities of ownership is paying taxes. Consider a retail shop paying payroll, property, sales taxes and more. Your retirement business will also have tax responsibilities. But just like the retail shop opening in the neighboring town because of lower taxes, there are options to reduce your ‘retirement business’ tax burden.
With so many people placing retirement savings into a 401(k)’s or other tax deferred savings plans that money is poised; like a sitting duck, to be hit with tax rate increases. When considering taxes, the question you must answer is, “What do you think the tax rates will be in the future?” The national debt is now above $28 trillion. Do you see taxes going down? Let’s do some quick and easy math.
SIMPLIFIED ILLUSTRATION
Say you have $1 million saved in your 401(k). Current tax rate is 37% (historic lows). Likely not the best option, but say you take it all out. You pay $370,000 and are left with $630,000 cash for your retirement. Looking at historic tax rates during the decade of the 1970’s, which had lowered previous tax rates, taxes were set at 70%. The same action would mean paying $700,000 in taxes and leaving only $300,000 for your retirement. Just like the retail shop opening in the neighboring town to reduce their business taxes. There are strategies to take advantage of current rates to increase the viability and longevity of your savings. Would the loss of $330,000 dollars due to taxes change what your retirement looks like?
This example is a simplification of the difference. As federal tax rate are set through a graduated system not all money withdrawn would be subject to the same level of taxation. Current graduated tax rates: 10%-37% — 1974 graduated tax rates: 14%-70%.
#4 Risk Management
I know we have covered some heavy material in a short time but there is one more element all business plans must address: Risk Mitigation! In a traditional brick-and-mortar business owner’s concern themselves with possibilities of fire, flood, liability, and workers compensation among other possible eventualities. Similarly, the risk of death and/or incapacitation of a spouse or partner, when not properly planned for will likely devastate your ‘retirement business’. Planning for these possibilities and in the case of death, eventuality, ensures retirement security for loved ones as well as your own legacy.
Just like how a restaurant fire, if not planned for, would end a business; long-term care can end your ‘retirement business’. There are effective options available to address both long-term care and legacy hazards. As we continue to live longer, leaving either or both risks unaddressed amounts to an owner of a restaurant knowing a fire is a foregone conclusion and deciding to operate without fire insurance anyway. Treat your retirement as a business. Mitigate the risks and address probable circumstances.
Conclusion
Throughout this blog I have eluded to options in developing your retirement business plan without getting too specific. That’s intentional. Your business plan is just that “YOURS” it will have similarities with other ‘retirement business plans’, but it is unique to you.
Consider the couple Dillon and Lana who worked hard their whole careers saving for retirement in their respective 401(k)s. They had considered starting a business about 20 years ago but decided entrepreneurship was not for them. Now as they approach retirement they’ve realized, “To retire the way they want to, they have to become entrepreneurs.” This is today’s retirement reality, but with sound advice and direction no one needs to experience a ‘retirement business’ failure.
Just like when opening any business, utilizing the expertise and knowledge of others is essential to success. The #3 reason for business failures is not having the right team. Utilizing an independent financial planner allows for expanded and customizable options. Running a business requires a team and your ‘retirement business’ is no different. Having an engaged and trusted partner can make all the difference.
TAKE CONTROL
The first, and often most difficult, step is deciding to take control. I had a friend once tell me, “There are two ways to operate a successful business; either on purpose or on accident. But operating it on purpose is the only way to sustain success.” Retirement businesses today can exceed 30 or even 40 years. For sustained success throughout your life operate your retirement business on purpose.
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