Steep challenges

Retirement used to mean winter homes in warm locations, leisurely walks and afternoon naps. A person’s income was relatively guaranteed due to a steady flow of lifetime income from Social Security and pension plans. People did not worry about the cost of medicine and doctor visits, because companies also provided lifetime health benefits. With these benefits dwindling, along with rising life-spans, the baby boom generation faces steep challenges in providing income for life, says Gary Storie, health management adviser for NexTier.

Many business owners are not exempt from these challenges. They are confronted with the issue of whether their business value will be adequate to fund retirement years, says Storie.

Smart Business spoke with Storie about how business owners can plan properly for retirement and still run a successful business.

How can a business owner plan lifetime income?
Business owners spend most of their time and money trying to make their business successful. They often put all of their resources into the business and neglect to plan for their personal future, believing that a successful business will guarantee a successful retirement.

It is necessary to sit down and make a lifetime plan or timeline, listing your goals and objectives. You must make two plans. One should be business plan and the other should be a personal plan. While these two plans may affect one another, they should always be separate and well defined.

A business plan should define where you want the business to be in the future, how you plan on expanding the business and how you will provide for the people working for the company.

A personal plan should define personal goals, retirement dates and a cash-flow analysis. Profit made from a business should be saved in a personal account as well as put back into the business.

What challenges do business owners face in planning for their future?
They sometimes make the mistake of tying up all their net worth in the business. They plan to save when the business is more successful.

There are many more options for people who plan ahead and invest early. Health care, which is very costly, must be allocated for because Medicare and Medicaid plans are not likely to cover expenses in the future.

Another risk is the lack of planning for risk assessment. If all savings are tied to a business, a major financial risk evolves for a business owner. The successes of some businesses fade as trends and lifestyles change.

Finally, owners fail to maximize the value of the business when retiring. Often a company is not purchased by a new owner in a lump sum.

What strategies can be used to meet these challenges?
An exit strategy should be created that includes a budget for desired living expenses adjusted for inflation during retirement. This cash-flow analysis will show a person how much needs to be saved before retirement. It is necessary to pay down debts before retirement.

Owners should put as much money as possible in retirement accounts. Special benefits and tax breaks should be identified and taken advantage of by owners. A comprehensively managed asset-allocation program should be implemented.

Investments need to be well diversified. People invest money but take too much out. Four percent is the most people can take from their portfolio annually during retirement to have enough money to last their lifetime. That is barely enough to cover inflation.

Finally, risk management issues such as life insurance, health insurance and long-term care should be addressed. There are benefits for business owners, such as a Health Savings Account.

What is the best advice you can give to someone who is concerned about lifetime income planning?
It is important to do a reality check about your future. Planning is crucial. Half of workers age 55 and older have not calculated their lifetime income needs. The average 65-year-old couple will live to be 85. This lifespan requires more money than most people originally planned. If you own a business, it is necessary to project potential income for retirement plans.

What can business owners do if they have not started planning?
Congress has created a catch-up provision for approaching baby boomers to accelerate their contributions or savings into their retirement. Someone over the age of 50 is eligible to take advantage of catch-up provisions as far as contributing to their retirement plan. A person can contribute up to $44,000 for the year 2006.

Put as much away as possible in a tax-deferred plan to profit as much as possible in a short time.

GARY STORIE is health management adviser for NexTier Bank. Reach him at (888) 262-6331 or [email protected].