Archives for September 29, 2019

With over 10,000 Americans turning 65 every day, the question of how to pay bills during retirement is on the minds of many. I have almost daily conversations with individuals planning for their next stage of life and surprisingly, while each situation is unique, the choices all dovetail into the same five ways that cash flow can be generated to pay for a desired lifestyle. And when I emphasize that these five are the most reliable ways to generate retirement income, they often look at me quizzically and express concern that these choices are too limited. Yes, I remind them, there really isn’t a retirement income fairy.

Here are the five most reliable ways cash flow can be generated in your later years:  

Inheritance and Gifts. For most Americans, receiving sizable financial gifts or inheritance is not the norm. Furthermore, in order for these to make a significant dent in your retirement cash flow needs, the amounts would have to be well into the six-figures. For example, if you retire at age 65 and live until age 90, a $100,000 inheritance could pay out about $10,000 per year for (only) ten years plus some interest. So unless your Aunt Margaret is very wealthy and you are one of her only beneficiaries, this shouldn’t be the only strategy you rely on.

Continue Working. This is an increasingly popular choice for a variety of reasons. For some, it is a necessity. For others, it is due to a desire to stay relevant, active, or mentally sharp. And for others, it is a time to get closer to a passion such as being a substitute teacher, an artist, or working for a charity. Working into what would otherwise be retirement is a perfectly fine choice. As a financial advisor, I often advise that this will be more optimal if the work is borne out of choice and not of necessity. So plan accordingly and stay healthy if this is your strategy. 

Social Security. I am hearing more cynicism about the future solvency of social security – especially from younger people. I find educated Millennials to be quite savvy at financial planning and many are rightfully concerned about social security. Given the current political winds out of Washington, it is not unreasonable to assume that benefits will be either ‘means tested’ (reduced for higher earners or the wealthy – whatever that definition is deemed to be), or heavily taxed. However, for those near retirement, I don’t expect reductions in benefits for the middle class or those at lower income levels. As a result, social security will remain a mainstay for the vast majority of Americans.

Pensions. A pension is an annual obligation of your employer to pay you income for life based on a blended formula of income and years of service. Very few private companies offer pensions, and they reserve the right to freeze the plans and stop increasing benefits. There is also the risk that the Company goes bankrupt, and your pension, even if insured by the Pension Benefit Guarantee Corporation (PBGC), may only payout a fraction of the promised amount. There are many reasons for the decline in pensions (longer life expectancies, costs, regulations, global competition, etc.), but for those who are fortunate to still be eligible for a pension, it is a very comforting and valuable. This is why public sector workers fight aggressively to keep these benefits. For now at least, pensions are somewhat common at the state and local level, but as America ages, these may also become less prevalent.

Personal Investments. If you are not expecting a sizable inheritance, are not eligible for a pension, and do not want to work or will be unable to work, then you are left with social security and your savings as your sources of income. This is why it is so important to save as early in life as possible in order to grow and accumulate you own pool of retirement assets. Actually, if you don’t save and social security is your only source of income, you may qualify for government assistance, but I rarely see people excited about this possibility. Therefore you are left with saving money during your working years in order to have personal funds to withdraw later in life.

I wish there were another way for people to have financial freedom, but unfortunately, regular saving, no matter how difficult the circumstances, is usually the best way to accumulate money and grow wealth. I understand the challenge millions of Americans face each day. At the same time, starting early and saving even a small amount can make a big difference later.

Retiring comfortably takes a lot of money — often $1 million or more. You don’t need a six-figure income to save that much, but you do need a plan and the discipline to stick to it. Yet many people make shortsighted choices that dash any hopes of retiring with enough money. Here are three mistakes you can’t afford if you hope to retire wealthy.

1. You’re guessing at how much you need to save 

Study after study has shown that people tend to underestimate how much they need to save for retirement. Transamerica found that baby boomers and Gen Xers estimate that they’ll need $500,000 on average for retirement, while millennials believe they’ll be able to get by with just $400,000. But the average retiree’s spending habits tell a different story.

The Bureau of Labor Statistics says that the average household headed by an adult 65 or older spends nearly $50,000 per year. If your retirement lasts 20 years and you spend that much each year, you’ll need $1 million to cover all your expenses. You don’t have to save all of that on your own because Social Security will cover some of it, but $400,000 to $500,000 in personal savings probably isn’t going to be enough. If you live into your 90s, which is becoming increasingly likely thanks to advances in medical care, your retirement could last even longer than 20 years, costing you even more.

To avoid depleting your retirement savings while you’re still alive, you need to come up with a personalized estimate of how much you need to save. Start by subtracting your ideal retirement age from your estimated life expectancy (plan to live into your 90s if you’re reasonably healthy). That will give you the number of years you should plan to be retired.

Next, total up your estimated annual living expenses, keeping in mind that some expenses, like healthcare, may go up, while others, like child care, may go down or even disappear. Multiply your living expenses by the number of years of your retirement, adding 3% annually for inflation. A retirement calculator will do this part for you. Use 5% to 6% for your annual investment rate of return to be conservative. Your calculator will then tell you how much you need to save overall and per month to hit your goal.

Subtract from these totals any money you expect from an employer 401(k) match, a pension, or Social Security. You can estimate your Social Security benefit by creating a my Social Security account if you’re not sure how far your benefits will go in retirement. The remainder is how much you need to save on your own.

2. You’re not saving regularly.

The best-laid retirement plan is worthless if you don’t follow through with the savings portion of it. Automate your savings if you struggle to remember to set aside the funds on your own. Your 401(k) should enable you to earmark a percentage of your income for retirement each pay period, and your IRA may give you an option for recurring contributions as well. 

Consider reworking your budget if you’re not saving for retirement because you can’t afford to. Look to cut your monthly expenses by dining out less, canceling subscriptions you no longer use, and finding other trims. Or you could look for ways to boost your income, like getting an extra job or working overtime. If none of that works, you might have to redo your retirement plan. Delaying it by a few months or years reduces how much you need to save while also giving you more time to do it. It could also boost your Social Security checks if you’re earning more in your later years than you were in the early years of your career.

3. You’re withdrawing money from your retirement accounts to cover other expenses.

In most cases, you’ll pay a 10% early withdrawal penalty, plus income tax if the money came from a tax-deferred account, when you withdraw money from your retirement account before age 59 1/2. There are exceptions to this rule for a first-time home purchase, educational expenses, or if you take Substantially Equal Periodic Payments (SEPPs), among other things. But while you may avoid the obvious penalty, you’re still hurting your savings’ long-term growth, even if you pay that money back with interest over time.

Imagine you borrow $10,000 from your 401(k) for a first-home purchase. You must pay it back with 6% interest over 10 years. You’ll end up repaying the initial $10,000 you borrowed, plus another $3,322 in interest for a total balance of $13,322. But if you’d left that money in your retirement account and it had earned a 7% annual rate of return, that $10,000 could’ve been worth $14,203 after 10 years. And the difference between the two amounts could be even greater if you borrow more, take a longer loan, or have a greater spread between your retirement plan’s loan rate and the annual rate of return on your investments.

Avoid dipping into your retirement accounts except as a last resort. Save in an emergency fund to cover unexpected expenses like medical bills or job loss. For large purchases like a home or car, budget a certain amount toward this each month and delay your purchase until you’ve saved enough to hit your goal. 

If you avoid the above mistakes, you should be able to save enough to last the rest of your life. More importantly, you’ll have the peace of mind in knowing you’re prepared.

Rajesh Srivastava always loved trading stocks and options. When he found a way to turn that passion into a software that helps traders analyze and respond to the market, he started a one-man business around it in 2015. He eventually left behind his career working for technology firms to run his company, priceSeries, in Sunnyvale, California, which he launched for less than $1,000 to cover three used servers he purchased on eBay, along with memory and storage for the servers.

He sells the software by monthly subscription to more than 2,000 customers a month, on average, and now has annual revenue of more than $1 million.

Srivastava has become one of a growing number of entrepreneurs who are hitting $1 million to $2.49 million in annual revenue before they hire their first employee. And many like him are hitting the million-dollar mark within three to five years. In 2017, the most recent year for which statistics are available, there were 36,984 firms at this revenue level, a 38% increase from 26,744 in 2011, according to the U.S. Census Bureau. Most of these firms are solo businesses, but some are partnerships and family businesses.

And more firms are closing in on this range, with 282,819 generating $500,000 to $999,000, up from 264,140 in 2016 and another 629,837 bringing in $250,000 to $499,999, up from 590,948 in 2016, Census data shows.

These solo enterprises are in a wide range of industries. The top fields: professional services, construction, real estate, retail, health care, social services and finance.

Some, like Srivastava, plan to keep their businesses very small to avoid the bureaucracy that comes with hiring employees. “I tried to figure out what the right way is to manage the business model,” says Srivastava. “Eventually, it came down to a single person managing this entire thing.”

Others eventually find it makes sense to start hiring a traditional team of employees.

So how do these entrepreneurs build million-dollar businesses using an ultralean operational approach? Here are five strategies they use to leverage their limited resources.

1. Automate your business.

To stay focused on the big picture and boost efficiency, many of these business owners automate as much of their business as they can. Advances in data analytics, artificial intelligence and cloud computing have widened the options for business owners. Today technology can help them with virtually everything — from marketing to customer service. This frees time for high-priority pursuits that only they can handle — and sometimes saves them money.

Srivastava does this when it comes to spreading the word about his business. To attract customers to his website, the entrepreneur wanted to try doing content marketing but realized it would be costly for a business his size to hire bloggers to write custom articles. He decided to program his open source web-based trade analysis software to automatically create unique charts each day that reflect selected trades and what’s going on in the markets. The system automatically posts each chart on the home page of his site, refreshing it daily.

This automatic method not only saves him money but has helped his business’ search engine ranking, putting him in front of more customers. “Google and the search engines are picking all of this up,” he says.

2. Hire trusted freelancers and contractors.

Even if they use automation, many solopreneurs reach the point where there is too much work for the owners to do it alone. Relying on freelance pros who can help them with tasks they would otherwise have to learn themselves — like bookkeeping, web design and digital marketing — helps the owners get more done in less time.

Alicia Schiro founded Aced It Events, her one-woman event-planning business in New York City, in 2016 and has grown the profitable firm to $1 million in annual revenue. Schiro, who won the Corporate Event Planner of the Year award from industry association BizBash in 2012, has organized events featuring luminaries like former NFL wide receiver Jerry Rice. Recently, she organized a 300-person event for a large corporate client that rented out Basin Harbor, a 700-acre resort on Lake Champlain, where activities included kayaking, hike and bike tours, Knockerball and sailing lessons. “I surprised them with a private firework show and finished off the night with s’mores,” she says.

One thing that helped her to tackle substantial-sized corporate events is bringing on trusted contractors to help with tasks such as research as she plans a meeting. She finds them by tapping her existing professional network and asking trusted colleagues referrals.

She has not had to look far to find these team members, given her past corporate career in events. “A lot of my former colleagues work in the industry,” she says. Having worked side by side with them in the past, she knows their work ethic and capabilities.

3. Outsource key functions.

To extend what they can get done in a day, solo entrepreneurs also turn to outsourcing for everything from content marketing and bookkeeping to payroll. An added advantage of outsourcing is that it can also provide continuity, operational expense control and risk management.

Although priceSeries’ Srivastava could have created his own payment-processing system, he decided to avoid the hassle of worrying about things like protecting clients’ payment data. He relies on PayPal instead. This approach saved him time and money, since he did not have to hire a team to build a custom payment-processing system into his website and did not have to take on the regulatory costs and federal state compliance requirements that come with keeping the data out of the hands of hackers. PayPal already has set everything up.

“When it comes to payments, no one does it better than PayPal,” he says. “They take a commission, but having them handle it takes multiple concerns out of my head. I don’t have to be in the security business.”

4. Invest in social media marketing.

Many million-dollar one-person businesses turn to low-cost social media to market their brands. Inspired by entrepreneur Gary Vaynerchuk, Schiro, the event planner, has been experimenting with the tool Ripple to curate her own videos to share with followers. “I learned that from Gary V.,” she says. “He’s been saying LinkedIn is a new social movement.”

Schiro has found that building nearly 2,500 LinkedIn followers and establishing a presence on Facebook and Instagram has helped her grow her business. Sharing videos on LinkedIn keeps her top of mind with clients who’ve used her services before and may need help in the future. Using Facebook and Instagram to share photos of some of her events helps build her brand’s image. It sends a message that “Hey, if you’re looking to do something, here is something we’ve done,” she says.

Ana Gavia, 26, a former medical student from Melbourne, Australia, started Pinkcolada, a bathing suit company, with just $200 in 2017. A self-taught designer, Gavia sketched a bikini, did internet research to find a factory in China that was willing to make a prototype, and posted a photo of the swimsuit on a Facebook ad, investing about $5 in the promo. She started getting preorders and soon placed an order for her first 100 bikinis.

With orders rolling in, she designed several more styles, testing them for popularity on Facebook and Instagram before investing in manufacturing. She built her following by running contests such as free giveaways, where five bikinis were up for grabs. Entrants have to follow her page and tag three friends. “That’s one of the most powerful ways to drive engagement,” she says.

Today the company’s annual revenues are more than $1 million.

5. Spend time on personal development.

Getting a business coach, taking an online course or joining a Mastermind group may seem like a luxuryto those just starting out,but to many entrepreneurs who reach seven figures, committing to constant learning is a necessity.

Shirag Shemmassian was good at being a student — so good that he earned a Ph.D. in clinical psychology. But he also had a strong entrepreneurial spirit, and in 2013, while completing his studies at UCLA, he started a college admissions consulting business called Shemassian Academic Consulting as a side hustle, helping students with interview preparation and planning application essays.

Today he has revenues of $1 million a year. One thing that helped him develop the right mindset to grow his business was investing in an online course called Zero to Launch by entrepreneurship and personal finance guru Ramit Sethi, author of “I Will Teach You To Be Rich,” he says. It was a purchase that he might not have made during the early years of his business.

“My parents immigrated to the U.S. from Lebanon during the civil war in the 1970s,” says Shemmassian. “It was all about going to school, doing well, getting a secure, high-paying job — living frugally. If I told my father I spent $2,000 on a video course, he would freak out.”

Shemmassian has no regrets, believing that constantly adding to his knowledge base is important to growing his own business. “If I don’t think it’s important, I won’t spend money on it,” he says. “Once I spend it, I’m committed. It’s very important to continuously learn.”

Srivastava of priceSeries turns to his customers when he needs business advice, since there are lots of learning curves. “There is no better mentor than your own customers,” he says. “They are going to buy from you. Any market segmentation study has zero value until your customer buys. If five customers are saying the same thing to me and there’s a common trend, that’s a new product. At the end of the day, five customers will give me the same value as a product management team.”