Financial Planning, Retirement Issues


Self Employed Retirement

March 28th, 2014 ernie Posted in Self Employed Retirement No Comments »

Self Employed RetirementSelf employed individuals must plan their retirement even more so that someone who has a company pension to count on. Even folks with company pensions should not just count on their company pension. It may not be enough to live on comfortably, however that is the subject of another post. This one is focused on what the self employed individual should be doing to ensure that they have the quality of life that desire when they retire and to also give them some flexibility regarding the time of their retirement.

Self Employed Retirement – Your Business is Successful!

Right now your business may be wildly successful and seemingly there is no end in site. we all know that 20 years, 30 years and 40 years of business can bring a lot of changes, some positive and some not so positive. The main message we want to provide in this post and convince people of is that they need to be saving for retirement every year that they are working whether it is for yourself in a self employment situation or even if you own a small business. We never know what life will bring us and it is always important to plan for the unknown.

Invest a Minimum of 10%

The best way to do that is to lock away a minimum of 10% every year in a retirement plan. if you can do that beginning at age 20 or when you start working, you will have sufficient money by the time you are 50, provided that is well invested, to decide what it is you want to do and not have someone else make the decision for you.

Of course you can keep working if you want, but the real message is that you are free to make your own decision about what you do next and you can have the flexibility to make your own decisions about how you want to continue your life. Just imagine not having to worry about having enough money during retirement or when you are approaching retirement.

Invest Well, Focus on Diversity, Don’t Chase High Risk Stocks

When you invest your retirement savings, focus on blue chip stocks that regularly pay dividends and grow their dividends over time. These blue chip companies will increase in stock value, the income will be paid every three months and be invested in more shares, growing your investments even further. This is by far the best way to increase your retirement savings especially if it is in a registered plan that is not taxed until you remove the funds from the plan.

As you build your business, don’t forget to focus on the long term plan for your retirement years so that they are as rewarding and successful as your working years.

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Self Employed Retirement Plans

November 21st, 2013 ernie Posted in Self Employed Retirement No Comments »

Self Employed Retirement PlansGovernment pensions help many people, but they are frankly not enough to live on and enjoy the quality of life that many of us look for in our retirement years. Individual consumers, especially those who are self employed must save additional money to live on during retirement and this is where self employed retirement plans are so important. If you are self employed you must have a personal self employed retirement plan, otherwise retirement is not going to be very pleasant.

Private pension plans can take various forms, however in Canada, they are known as Registered Retirement Savings Plans or RRSP’s and 401K’s in the US. Basically consumers make deposits with pretax dollars to these accounts with the corresponding reduction in the amount of tax they pay. It is these private self employed retirement plans that will make the difference between a poor retirement and one that is enjoyable and has the quality of life you want after you finish working for a living.

Self Employed Retirement Plans – Retirement Savings

Many people ask how much they should have in savings to last out their retirement. There are all types of answers, but if you make a couple of assumptions, you can quickly get to an answer that will work for many people. The first assumption regards how much income you can expect from your investments. This is the dividend yield or interest income from bonds and mutual funds. A reasonable yield for dividends is 4%, so let’s go with that number.

Next is how much income do you need in retirement. There are again all kinds of assumptions about needing less money when you are retired than when you are working. But the simplest and probably safest approach is that you should assume that you will live on the same amount you were making when you retired. If you use these assumptions and let’s say you made $50,000 a year when you retired, then you should hope to make the same from your government pensions and savings income.

For simplicity, let’s assume your government pension will be $10,000, then you will need $40,000 from your savings. At 4% you will need to have saved $1 million dollars by the time you retire. If you can do this, you will have no worries and you will die with a million dollars in your estate.

How Long Will You Live

Saving a million dollars before you retire is pretty tough although if you start when you first leave school and save 10% every year, it can be done, but most of us do not do that. The other thing we want to point out is that many people really do not want to leave a million to their families. They want to enjoy their lives as much as possible. This brings us to the question of how long will you live in retirement?

If you retire at age 60, many people will live into their 70’s and 80’s which can be 15 to 25 years after you retire. Taking a combination of income and principal every year from your plan will provide you with more money and you will require less money to be saved as well. The important thing is to estimate how long you will live. If your family history suggests that your relatives live to around 80, then you probably will as well, plus a couple of years.

This is where an adviser can really assist you in determining how long your money will last using some of the assumptions we have just discussed. The amount you need is less than a million using the assumptions above, however it really depends on how much you decide to take out of your plans and how fast.

Check out some of our other posts about retirement covering various subjects such as management risk, diversity, growth of your portfolio, etc.

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Tax Deferred Retirement Plan

June 21st, 2013 ernie Posted in Self Employed Retirement 1 Comment »

ptax deferred retirement planA tax deferred retirement plan is an investment plan that allows us as tax payers to invest pretax dollars into a plan, and collect income within the plan without paying tax as long as the funds are left in the plan. This is an excellent way for individuals to save for retirement using income that is only taxed when the money is withdrawn from the plan. The usual mantra is to invest in these plans when you have a high income and are attracting more income tax, then withdraw income when you are making less income. You still will pay tax, but at a lower rate of tax. The theory is that there will be a net savings for the tax payer and in many cases this is true.

Consumers can build up huge retirement savings by using pretax dollars when invested wisely with diversity in mind and in quality stocks and bonds. There will be wide swings in the actual value of the plan since stocks and mutual funds will vary a great deal, however if you are well invested in high quality dividend paying stocks, the value of your investment plans will continue to increase over time. This increase will be from both income from dividends and interest as well as appreciation of these investments.

Tax Deferred Retirement Plan – What to do With Tax Refunds

Consumers can save thousands of dollars with pretax money by using a tax deferred retirement plan. They can save much faster with pretax dollars than they could with after tax dollars. If they are in a high tax bracket they can save or reduce their tax payable by a significant amount and withdraw the money when they are in a lower tax bracket after they have retired. Tax refunds that are triggered due to investing in a tax deferred plan should always be invested into these plans as well or used to reduce other debt such as mortgages and loans.

For example, $10,000 invested in a tax deferred retirement plan would trigger a $5000 tax savings for a person at a 50% tax bracket. Therefore the cost to the tax pager is only $5000. Later when he retires and begins to withdraw money, let’s assume now that he is in a 25% tax bracket and withdraws the same $10,000, he will only pay $2500 in tax for a net tax reduction of $2500. This is the real power of a tax deferred retirement plan. Tax planning and income planning is something that your tax adviser or your income adviser can help you with to determine the best time to withdraw money from your plans.

All income in the tax deferred retirement plan is tax sheltered until it is withdrawn from the plan. This is a really powerful method for consumers to save money for their retirement! If you begin early in your life by saving money in a tax deferred retirement plan it is quite easy to accumulate well over a million dollars in the plan for your retirement. Even if you have a company sponsored retirement plan, with a tax deferred retirement plan as well you will have the confidence of knowing that your retirement is financially secure.

Why Should You Invest in a Tax Deferred Retirement Plan when you Have a Company Plan

If you are one of these lucky people to have a company pension, many people ask themselves why should they save additional money in a tax deferred plan. Turns out there are a number of reasons to save in one of these plans over and above the savings you get from decreasing your taxes.

These reasons include the following:

  • Not all pension plans are sufficient to provide the quality of life you may want to have in retirement.
  • Not all companies survive long enough to provide a pension
  • Not all companies pay sufficient money into the company pension plan
  • Early layoffs and retirements can mean a lower pension than planned

Assuming that none of these things mentioned above occur, then the real bonus is that you have a savings plan sitting there that can be used to provide you with a better quality of life that you were expecting. We really are suggesting that consumers should plan for the worst and in most cases the worst does not happen and you gain the benefits of having a savings plan to use for improving your quality of life during your retirement.

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Retirement Plans for Self Employed

June 7th, 2013 ernie Posted in Self Employed Retirement 1 Comment »

retirement plans for self employedRetirement plans for self employed people are one of the most important issues that people who run their own businesses have. Most do not even realize that their quality of life is going to be impacted by poor planning. They are so focused on running their business and building it into a successful operation, that they give very little thought to long-term planning. If we can get even one person to think about their retirement and plan for it, then we have done our job. Obviously we would like many people who are self employed to embrace retirement planning. In addition, many employees of small companies also do not have company sponsored retirement plans and must do their own planning as well for their retirement.

Retirement Plans for Self Employed Business People

Many business owners believe that their business will be their retirement plan. They will either sell it or will turn it over to a family member who will run it for them and they will reap the benefits. We hope that this strategy works for everyone. But we also believe that there should be a backup plan just in case the business fails, it does not sell for what you think that it should or it cannot support multiple family members  in a life style that everyone would like. Having a backup strategy just makes good business sense and that is why we think that business owners should save for retirement outside of their business operations. If they are successful in selling their business and have retirement plans set up as well, then this is a total bonus situation. The best of both worlds. If on the other hand their business venture does not turn out as well as they had hoped they still have their retirement savings to live on.

Employees who participate in a company pension plan will receive a pension from their employer when they retire. They may choose to top up their employer sponsored retirement plan to provide them with the quality of life during retirement that they are looking for. Self employed individuals must plan 1005 for their retirement and set aside money that will give them the quality of life they are looking for. They must 100% fund themselves and they must manage their retirement savings to deal with market changes over a period that could be as long as 40 years in some cases if someone were to begin work at 20 and retire at 60.

Biggest Mistake for Retirement Plans for Self Employed

The biggest mistake that most people make about retirement is that they start saving for retirement much too late. They end up not having enough money to retire in the lifestyle that they had assumed that they would have. There are only so many options when faced with this kind of situation. Either you continue working and work longer than planned, or you reduce your expectations during retirement and do not have the quality of life you had planned.

We mention quality of life several times. For some people this is traveling and vacationing around the world when they retire. For others, living at the cottage and spending time with the family is what is important. Whatever your plan is, we suggest that you take the time to figure out how much money you will need each year to live in the manner you prefer and then ensure that you have a savings plan in place that will allow you to achieve these retirement dreams.

One last point we would like to make. Sometimes unforeseen events come along that prevent us from working as long as we had planned. It could be everything from a failed business to health related issues. In addition to your retirement fund, try to also have an emergency fund set aside to deal with these unforeseen surprises. If you never use the emergency fund, then you will have more for your retirement!

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