Live long and prosper

April 1, 2007

Some business sales are structured in a way that provides for the former owner to remain a consultant for periods as long as several years.

Back then, you knew you had to plan ahead for a secure retirement, but there were few options. Now, retirement planning is complicated by a confusing range of plans, not to mention a much longer average lifespan.

Then there's that old bugaboo, inflation, and its long-term effects on your retirement portfolio. These days, one of your biggest retirement challenges is figuring out a way to make your money last at least as long as you do.

Today's retirees are not only living longer, they're enjoying better health.

Age 65 was long regarded as the benchmark for "old age." Today's retirees might expect to live 20 or 30 years beyond that. While those additional years will be a welcome bonus for most people, they also introduce the risk of outliving your savings. That's why keeping up-to-date on managing your personal finances has become so important.

As a business owner or practicing professional, you don't have a mandatory retirement age. You can continue to work as long as your circumstances permit. But whether you will hang it all up at once or gradually phase out of your career is a choice you will have to make somewhere down the road.

However, one important choice that you must make now - if you haven't already made it - is how you will fund your retirement years. Whether your savings are already going into a tax-favored retirement plan or a plain investment portfolio, your plan should look ahead to when you finally leave the working world. The earlier you design your plan for retirement, the more choices you have. The longer you wait, the more restricted your options will be.

Your retirement plan can be as simple as an individual retirement account (IRA), or you can opt for a Roth IRA, SEP, a Keogh or a solo 401(k). The best choice for you will depend on such variables as whether you have employees, the size of your business or practice, your age and your plans for business growth. This choice is so important, and so complex, that you should seek the advice of your accountant or other financial adviser before committing yourself. Whether you will benefit most from a retirement plan that defers taxes until you begin withdrawals, or whether it is best to pay taxes on your retirement investments now and enjoy tax-free withdrawals at retirement, is another decision that depends on your circumstances and your own preferences.

Retirement plans should be flexible

As your circumstances change, you will want to be sure that your retirement plan continues to reflect your changing needs.

Your accountant should be a partner in this important part of your business life. Among other circumstances that can affect your retirement are the never-ending changes in our tax laws. For example, the Pension Protection Act (PPA) of 2006 signed into law by President Bush last summer is profoundly important for many future retirees. PPA makes permanent the increased contribution limits to IRAs, 401(k)s and other qualified retirement plans that were scheduled to expire in 2010. For those who can afford to make the maximum allowable contributions, this change greatly enhances retirement security.

PPA has a number of other provisions that can affect your retirement planning. Check with your tax adviser to see if any of them affect you.

What happens to your business at retirement?

Another important aspect of your retirement plan involves the business itself.

Will you sell the business? Liquidate it? Pass it on to a family member or friend? You may not be able to answer these questions with certainty now. Still, include these considerations in your long-range plan.

You may decide to sell to an outsider or simply groom a family member or someone else to succeed you. Depending on who you choose, you will need to decide what role, if any, you want to play once you are no longer at the helm.

For example, would you like to stay on as an adviser or consultant for some specified period? If you do, will you fold the arrangement into the selling price, or will you structure the sale to provide income for yourself during the transition to new ownership? Some business sales are structured in a way that provides for the former owner to remain a consultant for periods as long as several years.

Numerous arrangements can be part of your transition to retirement. You may, for example, arrange to scale back your work to part time while you continue to draw a salary. Your bill of sale may also include separate compensation for a noncompete agreement.

If you own the real estate that houses your business/practice, you may decide to sell it along with the business, or retain it as a source of continuing income by renting it to the buyer or another tenant.

Regardless of the many variables that you may have to address over the years preceding your retirement, you should not wait until retirement is just over the horizon before developing your strategy. Otherwise, you'll find that your options are far more limited.

The time to forge your plan for achieving a comfortable and secure retirement is now.

Mr. Lynott is a former management consultant and corporate executive who writes about business and financial topics for various consumer and trade publications. His latest book, Money: How to Make the Most of What You've Got, is available through most bookstores. Reach him at lynott@verizon.net or through his Web site: http://www.blynott.com/