Current Thinking

A Tale of Two Businesses

A blog by Rich Rausser, CFC, QPA, QKA, Senior Vice President, Pentegra Retirement Services – April 11, 2017

With Small Business Week on the horizon (April 30 to May 6), I want to talk about how a retirement plan can be used as an important asset for a small business.

Retirement plans can be designed to help small business owners preserve what they have built, achieve the retirement life they want and protect their assets. Think you can’t afford a retirement plan? Think again as you consider the following hypothetical example.

Don Martin is the owner of Don’s Precision Machining, a small successful business operating with 5 employees. Don opened his doors for business when he was 40 and with his hard work his business has thrived. At age 67, after 27 years in business, Don has decided he is ready for retirement. None of his children want to take over the business so Don has been seeking a buyer.

What happens now?
With an uncertain economy and a shortage of available credit for business owners, Don has not been able to find a buyer for his business. With only his house and limited other assets he has determined he needs to continue to work and retirement is not in his immediate future after all.

What could have happened?
Under a different scenario, Don’s Precision Machining had established a defined benefit plan when Don was 45. The plan funded retirement benefits and all the plan contributions were deductible on his business tax return. At age 67 Don is able to take a lump sum payment of $2.3 million from his defined benefit plan. Don rolled the money to an IRA where it can continue to grow and he will pull out enough money each year to cover his living expenses. Don will sell off the equipment from his company when he is able to find a buyer and add to his pool of money for retirement.

A less fortunate Don
Everything does not always go as we planned. Suppose Don has the misfortune to become ill twelve years into running his business, at age 52. In declining health Don would likely find it increasingly difficult to continue his active his role in the business. Don may try to sell the business but may not be able to find a buyer willing and able to pay an acceptable price.

After two years of struggling suppose Don succumbed to his illness, leaving behind his wife of 25 years, three children and his other dependent family – his employees.

What happened next?
Don had no retirement plan and no life insurance. Upon his death his wife Suzanne stepped in and took over operation of the business. She did not have Don’s knowledge or skill, however, and the business failed within 2 years. With no other source of income Suzanne had to find other employment to support herself and her children.

What could have happened next?
Don’s Precision Machining had established a defined benefit plan when Don was 45. The plan funded retirement benefits and also included life insurance. Upon Don’s death Suzanne received a $1 million lump sum retirement benefit from the plan plus a $1.5 million income tax-free death benefit from the life insurance. Due to the financial protection from the defined benefit plan, along with the life insurance proceeds, Don’s wife was financially secure.

Are YOU prepared for reality?
What does this tale of two businesses tell us? Most closely held businesses have no transition plan and maintain no retirement plan.

In fact, only 35% of businesses survive the first generation. Will yours?

These failures are not surprising considering what independent data tells us. Only 1% of businesses with fewer than 10 employees maintain a defined benefit plan, the most secure of retirement plans. And 42% of all Americans have no life insurance at all.

These scenarios can be avoided with some basic planning. Get started today by answering these key questions:

  • What do you want to happen to your business?
  • When do you want to retire?
  • Who needs to be taken care of if you don’t make it to retirement?
  • Who do you want to transfer your wealth to?

The planning decisions are really quite uncomplicated. As a small business owner, you just need to make them.

NOTE: Information presented herein is for discussion and illustrative purposes only and is not a recommendation or an offer or solicitation to buy or sell any securities. Past performance is not a guarantee of future results.

About the Author

Richard Rausser

Richard W. Rausser has more than 30 years of experience in the retirement benefits industry. He is Senior Vice President of Thought Leadership at Pentegra, a leading provider of retirement plan and fiduciary outsourcing to organizations nationwide. Rich is responsible for helping to shape and define Pentegra’s viewpoint on workplace retirement plans, plan design strategy, retirement success and employee savings trends. His work is used by employers, employees, advisors, policymakers and the media to produce successful outcomes for American workers.  In addition, Rich is responsible for Pentegra’s Defined Benefit line of business, which includes a team of Actuaries and other retirement plan professionals as well as Pentegra’s BOLI line of business.  He is a frequent speaker on retirement benefit topics; a Certified Pension Consultant (CPC); a Qualified Pension Administrator (QPA); a Qualified 401(k) Administrator (QKA); and a member of the American Society of Pension Professionals and Actuaries (ASPPA). He holds an M.B.A. in Finance from Fairleigh Dickinson University and a B.A. in Economics and Business Administration from Ursinus College.


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