Client Success Story: The Hansens
The Small-Business Secret excerpt from SmartMoney Magazine
September 16, 2008
by Angie C. Marek
The sprawling homestead Bob and Susan Hansen moved into this summer is nestled in Montana's Ruby Valley, with a giant deck and sweeping views of Wisconsin Creek, a fly-fishing playground where elk roam. It's their retirement dream house, but if you'd asked them six years ago, they wouldn't have been so sure they'd ever get there. Although Bob had begun earning a very healthy salary as an aerospace executive, the couple's nest egg had just barely cracked six figures, and retiring in their 50s seemed like a long shot. Their solution: A big change in strategy and a series of accounting somersaults. Bob left the corporate world in 2005 and founded Big Sky Consulting, a mostly one-man show (with Susan as scheduler) that advised small aerospace firms on mergers. And with the help of Ted Gregory, Hungtington Beach -based certified financial planner, he equipped the firm with a defined-benefit plan — the sort of old-school pension one might associate with the good old days of the railroads and airlines. Soon he and Susan were setting aside nearly all their business income, which totaled as much as $200,000 annually, in tax-deferred retirement accounts; in a year or so, Bob, now 54, hopes to be fully retired. "It just all fit together for us," Bob says, "like a jigsaw puzzle."
Starting your own business to boost your savings may sound counterintuitive — after all, it looks pretty risky compared to a 401(k). Still, the number of entrepreneurs has exploded in recent years thanks to the Internet, which has allowed any mom and pop with a brainchild to start a business at a relatively low cost. And almost one in six small-business owners started his enterprise after age 45, according to the National Federation of Independent Business. Best of all, if a new business does very well and generates enough surplus revenue, it can enable the owner to put together a supercharged pension plan like the Hansens'. Compared with the defined-contribution plans we've all gotten used to, these plans have very high yearly contribution limits, especially for employees older than 45. (They do limit the amount of income one can create for the future at $185,000 a year — meaning accounts can't grow above $2.2 million.) The plans can also eventually be rolled into a traditional IRA — so unlike with a traditional pension, the beneficiary has flexibility about where to invest the assets after retiring.
Fewer than 1 percent of businesses with 20 or fewer employees use these plans, but that may very well change. A 2006 pension reform law made them easier to set up, and companies like San Francisco's Dedicated Defined Benefit Services now specialize in drawing up simple contracts and then administering the plans on the investors' behalf. Still, the plans aren't for everyone, cautions Ted Gregory. "If you have high volatility in your income," he explains, "the costs can add up quickly"; among other things, you'll have to pay actuaries to revise your plans if your year-to-year contributions are erratic. And if your firm has other full-time employees, the law requires that you sweeten everyone's pot when you sweeten your own — in other words, you have to fund their pensions, too.
Not interested in becoming a part-time pension accountant? Self-employed people still have a lot of flexibility to pump up their nest egg. While corporate types bump up against $15,500 annual 401(k) contribution limits ($20,500 if they're age 50 and over), the self-employed can contribute a full 25 percent of their income, up to $46,000 each year, to Keogh or Simplified Employee Pension plans — typical vehicles used by small businesses. And solo 401(k)s, which are available to businesses with just one full-time, adult employee or one full-time employee plus spouse, can be even more powerful: People age 50 and over can contribute up to $51,000 a year, and the 25-percent-of-income cap goes away.