Tag Archives: Moms Making a Million

Women, Business, and Retirement Planning

  By petillo | September 11, 2010 - 6:33 am | 401k, financial planning, Repercussions: A Retirement Review, Retirement Planning Target 2025, women and business, women and retirement
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I just recently began season two of a radio show with Gina Robison-Billups and Kat Bellucci.  Quite often, Gina reminds us what this project is designed to do: help women in business not only achieve their goals but to level the playing field in business. This playing field, it seems, isn’t level for any of the players when it comes to retirement planning.

We have discussed numerous ways for the moms in the her audience to create and maintain a retirement that is both affordable and provides the right incentives for all of their employees.  But while women (and men) concentrate their time and efforts into growing the business itself, what you don’t see or accidentally ignore, could cost in terms of legal fees and quality employees.

Once the business you are in becomes big enough to consider more than just a self-employed IRA for your retirement plan, an IRA suited best for the business owner and employer of one, the decisions seem to suddenly become more complicated and costly.  You might be CEO, chief sales person, plant manager and human resource department among the numerous hats you might be donning as your business grows.  But don’t forget, you will also be the chief financial officer.

CFOs are faced with numerous problems when it comes to creating and maintaining a 401(k) plan.  You will need to hire a plan sponsor. At first, you will wonder if this is a necessary step.  But there are numerous reasons why you should hire what you can afford.

In a small business situation, the simple plan is probably the best.  Often referred to as a prototype, the plan comes with some basic elements in place and some you may not have considered. The best advice in structuring your 401(k) is to separate the elements of the plan.  Mutual fund and insurance companies offer a complete package of services designed to make the plan a sort of one-stop shop sort of affair.  Now, I’m not saying that this is a bad idea and on the surface it may look as if it might be the most cost efficient.  But in the long-run, as your company expands, it might become more burdensome.

As the CFO, you need to consider compliance and regulation issues. This is almost impossible to do in-house. Hiring outside of your company may cost a little more than your typical investment/insurance company might offer, but consider asking yourself these questions when hiring them: are they capable of protecting your plan and its participants from costly mistakes, regulatory penalties, liability exposure and all nature of aggravations that will act as distractions and interfere with the operation of your business or non-profit organization?  They might say yes but the simple truth is, much of those issues fall back to you should they become legal actions.

According to CFODailyNews.com, one of the scariest parts surrounding 401(k) plans, is the participant lawsuit. Why? because if you haven’t done your job, you will probably lose a lawsuit. According to the site: “Recently, there’s been a spike in employee lawsuits over excessive 401(k) fees. The scary part: If you can’t prove that your company did its best to negotiate lower fees from your 401(k) provider, courts are likely to rule against you.”

One of the main reasons employers use 401(k)s, aside from their ability to create retirement wealth that is directed by the employee themselves, is the matching contribution.  This is something the employer provides and people beginning their plans should keep a couple of things in mind when deciding how much to offer or even to offer anything at all.  We have all heard news reports over the last couple of years about companies reigning in the 401(k) matches, citing difficult economic times.  While we have also heard about the huge amounts of cash they are hoarding, taking something away from employees is harder to do than you might imagine.

So when beginning to offer a match, keep in mind that no match or a little match can be improved upon. Small business employees will understand your prudence and might even see it as a wise business choice made by a smart owner. If you do decide to offer something, consider selecting a match that motivates current and potential employees, increases employee participation in your plan, affectively works at appreciation of the 401(k) plan and helps reduce employer contributions needed to pass ADP/ACP tests (actual deferral percentage/actual contribution percentage).

Now you might think that no match or a low match might be considered stingy.  But studies have begun to show that the higher the match, the higher the likelihood your employees will contribute only the enough to meet the match. Another consideration when building these plans is to offer them some sort of way to see the future.  It used to be that a number goal was what we all chased.  Now, we need to know how long the number goal will last.

And most importantly, women business owners can do their female counterparts a huge service by offering a lifetime annuity in their plan choices.  Now, as a rule I am not a fan of the annuity.  They cost a lot and are sold with all sorts of add-ons.  But they are particularly treacherous for women who receive a lump sum at retirement.  Annuities consider length of life and determine the payout based on actuarial assumptions. Shopping for one after retirement, leaves women vulnerable to getting far less than they would had they had access to it while they were working.

For Women: Life Insurance in the Right Amount

  By petillo | June 4, 2010 - 4:15 am | Uncategorized
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Over the last couple of shows on MomsMakingaMillion, we have been discussing ways to close the investment gap that women have with men. On this Friday’s show (06.04.10), we are going to look at another gap that has persisted to exist even as women have become more financially savvy and have generated an increasing amount of wealth for their households.

In a two-person household, the life insurance policy that covers the man is often larger than the policy that the woman has – if the woman has a policy at all.

In spite of all of the financial strides women have made over the years, I thought that this seemed odd. If you think about it, life insurance is not something any of us really want to talk about. Although it provides a financial safety net for the ones we love, it also represents an end-of-life scenario that we don’t find particularly appealing.

Not only that, when men and women do purchase policies, it is often the man who has the larger of the two. But that’s not the way it should be.

I’m not quite sure why, but men have this protect-the-cave attitude when it comes to insurance while women are more about protecting who is in the cave. The insurance policies that men purchase often are large enough to cover the mortgage, the college education of their children and about 10 years of living expenses for their wife. And many men feel perfectly comfortable with this scenario.

The problem is this discounts the net worth of the woman in the house. There are however a couple of caveats before we move on. First, insurance is a necessary part of a financial plan; second, we don’t like to buy it; and third, we never know whether it will be enough.

When it comes to buying insurance which might be one of the last throwbacks to an era when the man was the head of the household, you need to consider a couple of things other than the obvious life insurance rates. If a women lost her husband’s income, the thinking went, you would become homeless, your kids would be denied all of the opportunities they might have had had Dad lived and you would be a penniless widow forced to go to work to make ends meet. So men got the larger policy, sometimes ten times as large based on the 10-year format.

But if you think about it, the loss of a stay-at-home mom would be more of a financial disruption than we might consider. Not only would the loss be devastating, the cost of childcare would present some huge financial hurdles for the newly widowed dad which would impact his job, the future of the kid’s education and a whole host of financial securities that mom brings to the table.

And let’s not forget that mom also brings home a paycheck. In this day and age, any permanent loss of income can create a financial hurdle that would be difficult to overcome. Most stay-at-home moms aren’t stay-at-home forever. They eventually go back to work. So not only is the lost income a factor, childcare costs play a role in the need for insurance.

But the question always reverts back to: how much is enough?

We can buy more than we need if we buy it when we are young. And despite what the agent will offer, which will include policies that do some investing, creating a cash balance that eventually pays the premiums, stick with term life insurance. It’s cheap and you can buy a lot of coverage for the exact period of time you need it. Twenty-years is typical.

While not all states offer a level payment option for this policy – in other words, one payment for 20 years – most do. In insurance lingo, they will refer to this as a temporary policy. This is good for families that have mortgages, outstanding student loans or who have a small business. It should be able to cover the loss of income for a ten-year period, minimum. A policy of about $500,000 should be adequate to cover a family with a $250,000 mortgage, college costs of about $100,000 and the income of the surviving spouse at around $50,000. For a woman aged 25, this type of policy would cost between $200 and $500 a year.

(It is assumed that the surviving spouse would not pay off the mortgage with a lump sum payment but rather made mortgage payments, that college would be something that would be saved for and that the income provided, averaged over those ten-years is only adequate. A $500,000 policy will not make the surviving spouse rich, just comfortable enough to keep their financial footing.)

If you are a smoker, double that premium. If you wait until you are 45, you would also pay twice as much as you would if had you bought the policy at 25.

Keep in mind, term life insurance is only needed when you have few assets and lots of liabilities (kids, mortgages, loans, college) and is not really all that important once you have built a good financial footing. But women should be insured on equal footing as men. Not only does it cost less but it provides even more peace of mind than you might imagine. And the simplest policy is really all you need.

MomsMakingaMillion: Small Business Retirement Plans and the SEP-IRA

  By petillo | February 4, 2010 - 3:48 pm | 401k, IRA, Retirement Planning Target 2025
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In part two of a three part discussion on small business retirement plans, we look at the SEP-IRA on MomsMakingaMillion radio.

Kat: Last week you told all of us about the solo 401(k).  You drove home the importance of a salary as a business expense and because you do this, it made you eligible for a solo 401(k).  But suppose your business is growing?

Paul: To consider retirement at the onset of your company’s creation is paramount to that goal. We may say we are working for the glory and the independence, the profits and the satisfaction but in truth, we are working for the payoff.

While the solo 401(k) is designed for the business of one, often times that business will grow to include other people. Product lines expand as your success grows. Contracting out work can be a temporary stopgap yet if you would like to see your business grow to entice more customers and control the quality of your projects, you may need to hire people to work with you in those goals, folks who share your ideals and passions, the same people who, because of their dedication will also be deserving of a piece of the profits generated.

Kat: It’s about the profits.  What can the small business person do?

Paul: A SEP-IRA can fill those needs nicely. But like all taxable events, the rules need to be followed. SEP-IRA or self-employed pension individual retirement account allows you, the employer of one or more, to share in the profits of your business by making contributions to this type of plan.

It acts just like a traditional IRA would with added feature of shifting contributions. In good years, the plan can allow contributions of up to $49,000 per employee. This contribution is tax deductible for the business and the growth of those funds is tax deferred. In years when the business profits falter or are simply subject to cyclical changes, the contribution can be lowered or eliminated completely.

Kat: Who can use a SEP-IRA?

Paul: SEP IRA is a retirement plan designed to benefit self employed individuals and small business owners. Sole proprietorships, S and C corporations, partnerships and LLCs qualify. In those circumstances, the company pays the business owner (you) a W-2 salary. In this situation, the annual SEP IRA contribution can be between 0% to 25% of the owner’s W-2 salary up to the SEP IRA contribution limit. The caveat: you must also contribute to your employees the same percentage as was contributed to yours.

Kat: So if you pay you, you have to do the same for your employees?
Paul: Yes.  But the 25% is for incorporated businesses. The contribution limits are slightly lower for an unincorporated business such as a sole proprietorship, unincorporated partnership or a LLC electing to be taxed as a sole proprietorship. In this instance, annual contributions are made into your SEP IRA account between 0 to 20% of your net adjusted self employment income. Either way, these are hefty savings allowances compared to the limits placed on other types of retirement plans.

One important thing to consider though: having a solo 401(k) as well.

Kat: Really?  You can have both?

Paul: Because a SEP-IRA is dependent on profits and if you have employees, sharing those profits with them, a solo 401(k), allowable as well alongside the SEP-IRA, gives you another opportunity to put away money for retirement from your income, which may not be reliant on the profits of the business.

Kat: Who is eligible?

Paul: Eligible employees must be at least 21 years of age and have worked for you for at least three years of the last five years. SEP-IRAs are easy to set up and cost effective, may have little or no paperwork to file with government and could net you a tax deduction of up to $500 for the first three years of the plan. Plans are administered by the employer through a mutual fund company. generally offering a simple basket of funds from which to choose.

How about next week we talk about something SIMPLE?