How Do Single(k) Plans Work?

What is a Single(k) Plan?

A Single(k) plan is an employer sponsored retirement plan for owner only entities, meaning you have no full-time employees. These owner only entities get the benefits of having a full fledge 401(k) plan without the large administrative costs associated with traditional 401(k) plans.

What is the definition of a “full-time” employee?

Often times a small company will have some part-time staff. It does not matter whether you consider them “part-time”, the definition of full-time employee is defined by the IRS as working 1000 hours in a 12 month period. If you have a “full-time” employee you would not be eligible to sponsor a Single(k) plan.

Types of Contributions

There are two types of contributions to these plans. Employee deferral contributions and employer profit sharing contributions. The employee deferral piece works like a 401(k) plan. If you are under the age of 50 you can contribute $19,500, in 2021, in employee deferrals. If you are 50 or older, you get the $6,500 catch up contribution so you can contribute $24,000 in employee deferrals.

The reason why these plans are a little different than other employer sponsored plans is the employee deferral piece allows you to put 100% of your compensation into these plans up to those dollar thresholds.

In addition to the employee deferrals, you can also contribute 20% of your net earned income in the form of a profit-sharing contribution. For example, if you make $100,000 in net earned income from self-employment and you are over 50, you could contribute $24,000 in employee deferrals and then you could contribute an additional $20,000 in form of a profit sharing contribution. Making your total pre-tax contribution $44,000.

Establishment Deadline

You have to establish these plans by December 31st. In most cases that plan does not have to be funded by 12/31 but you have to have the plan document signed by 12/31. You normally have until tax filing deadline plus extension to fund the plan.

Loans & Roth Deferrals

Single(k) plans provide all of the benefits to the owner of a full 401(k) plan at a fraction of the cost. You can set up the plan to allow 401(k) loan and Roth deferral contributions.

SEP IRA vs Single(k) Plans

A lot of small business owners find themselves in a position where they are trying to decide between setting up a SEP IRA or a Single(k) plan. One of the big factors, that is often times the deciding factor, is how much the owner intends to contribute to the plan. The SEP IRA limits the business owner to just the 20% of net earned income. Whereas the Single(k) plan allows the 20% of net earned income plus the employee deferral contribution amount. However, if 20% of your net earned income would satisfy your target amount then the SEP IRA may be the right choice.

Advanced Strategy Using A Single(k) Plan

Here is a great tax strategy if you have one spouse that is the primary breadwinner bringing in most of the income and the other has self-employment income for a side business. If the spouse with the self-employment income is over the age of 50 and makes $20,000 in net earned income, they could set up a Single(k) Plan and defer the full $20,000 into their Single(k) plan as employee deferrals. If they had a SEP IRA, the max contribution would have been $4,000.

A huge tax savings for a married couple that is looking to lower their tax liability.

About Rob……...

Hi, I’m Rob Mangold. I’m the Chief Operating Officer at Greenbush Financial Group and a contributor to the Money Smart Board blog. We created the blog to provide strategies that will help our readers personally , professionally, and financially. Our blog is meant to be a resource. If there are questions that you need answered, pleas feel free to join in on the discussion or contact me directly.

Strategies to Save for Retirement with No Company Retirement Plan

The question, “How much do I need to retire?” has become a concern across generations rather than something that only those approaching retirement focus on.  We wrote the article, How Much Money Do I Need To Save To Retire?, to help individuals answer this question.  This article is meant to help create a strategy to reach that number.  More specifically, for those who work at a company that does not offer a company sponsored plan.

Over the past 20 years, 401(k) plans have become the most well-known investment vehicle for individuals saving for retirement.  This type of plan, along with other company sponsored plans, are excellent ways to save for people who are offered them.  Company sponsored plans are set up by the company and money comes directly from the employees paycheck to fund their retirement.  This means less effort on the side of the individual.  It is up to the employee to be educated on how the plan operates and use the resources available to them to help in their savings strategy and goals but the vehicle is there for them to take advantage of.

We also wrote the article, Comparing Different Types of Employer Sponsored Retirement Plans, to help business owners choose a retirement plan that is most beneficial to them in their retirement savings.

Now back to our main focus on savings strategies for people that do not have access to an employer sponsored plan.  We will discuss options based on a few different scenarios because matters such as marital status and how much you’d like to save may impact which strategy makes the most sense for you.

Married Filing Jointly - One Spouse Covered by Employer Sponsored Plan and is Not Maxing Out

A common strategy we use for clients when a covered spouse is not maxing out their deferrals is to increase the deferrals in the retirement plan and supplement income with the non-covered spouse’s salary.  The limits for 401(k) deferrals in 2021 is $19,500 for individuals under 50 and $26,000 for individuals 50+.  For example, if I am covered and only contribute $8,000 per year to my account and my spouse is not covered but has additional money to save for retirement, I could increase my deferrals up to the plan limits using the amount of additional money we have to save.  This strategy is helpful as it allows for easier tracking of retirement accounts and the money is automatically deducted from payroll.  Also, if you are contributing pre-tax dollars, this will decrease your tax liability.

Note:  Payroll deferrals must be withheld from payroll by 12/31.  If you owe money when you file your taxes in April, you would not be able to go back and increase your deferrals in your company plan for that tax year.

Married Filing Jointly - One Spouse Covered by Employer Sponsored Plan and is Maxing Out

If the covered spouse is maxing out at the high limits already, you may be able to save additional pre-tax dollars depending on your Adjusted Gross Income (AGI).

Below is the Traditional IRA Deductibility Table for 2021.  This table shows how much individuals or married couples can earn and still deduct IRA contributions from their taxable income.

As shown in the chart, if you are married filing jointly and one spouse is covered, the couple can fully deduct IRA contributions to an account in the covered spouses name if AGI is less than $99,000 and can fully deduct IRA contributions to an account in the non-covered spouses name if AGI is less than $184,000.  The Traditional IRA limits for 2017 are $5,500 if under 50 and $6,500 if 50+.  These lower limits and income thresholds make contributing to company sponsor plans more attractive in most cases.

Single or Married Filing Jointly and Neither Spouse is Covered

If you (and your spouse if married filing joint) are not covered by an employer sponsored plan, you do not have an income threshold for contributing pre-tax dollars to a Traditional IRA.  The only limitations you have relate to the amount you can contribute.  These contribution limits for both Traditional and Roth IRA’s are $5,500 if under 50 and $6,500 if 50+.  If married filing joint, each spouse can contribute up to these limits.

Unlike employer sponsored plans, your contributions to IRA’s can be made after 12/31 of that tax year as long as the contributions are in before you file your tax return.

Please feel free to e-mail or call with any questions on this article or any other financial planning questions you may have.

Below are related articles that may help answer additional questions you have after reading this.

Traditional vs. Roth IRA’s: Differences, Pros, and Cons

A New Year: Should I Make Changes To My Retirement Account?

Backdoor Roth IRA Contribution Strategy

About Rob……...

Hi, I’m Rob Mangold. I’m the Chief Operating Officer at Greenbush Financial Group and a contributor to the Money Smart Board blog. We created the blog to provide strategies that will help our readers personally , professionally, and financially. Our blog is meant to be a resource. If there are questions that you need answered, pleas feel free to join in on the discussion or contact me directly.

How Much Money Do I Need To Save To Retire?

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This is by far the most popular question that we come across as financial planners. You may have heard some of the "rules of thumb" like “80% of your current take-home pay” or “1 million dollars”.  In reality, the answer varies greatly on an individual by individual basis.  This article will outline the procedures that we follow as financial planners to help individuals answer this very important question.

Step 1:  Estimate Your Annual Expenses In Retirement

The first step is to get a ballpark idea of what your annual expenses might look like in retirement.    The best place to start is to list your current monthly and annual expenses. Then create a separate column labeled “expenses in retirement”.  Whether you are 2 years, 10 years, or 20 years away from retirement the idea is to pretend as if you were retiring tomorrow and determining what your annual expenses might look like.  Some of your expenses in retirement will be lower, others may be higher, but most people find that a lot of their current expenses will carry over at the same level into the retirement years. This is because most people have become accustom to a certain standards of living and they intend to maintain that standard of living in retirement. Here are a few important questions that you should ask yourself when forecasting your retirement expenses:

• How much should I budget for health insurance?

• Will I have a mortgage or debt when I retire?

• Do I plan to move when I retire?

• Since I will not be working, should I budget additional expenses for vacations and hobbies?

• Will I need to keep my life insurance policies after I retire?

Step 2:  Adjust Your Retirement Expenses For Inflation

Now that you have a ballpark number of your annual expenses in retirement, you will need to adjust those expenses for inflation.  Inflation is just a fancy word for “the price of everything that we buy today will gradually go up in price over time”.  If the price of a gallon of milk today is $2 then most likely 20 years from now that same gallon of milk will cost $3.51.  A 75% increase!!   Historically inflation has grown at a rate of about 3% per year.  There are periods of time when the rate of inflation grows faster or slower but on average it grows at 3% per year.

Another way to look at inflation is $20,000 in today’s dollars will not buy the same amount of goods and services 10 years from now because inflation erodes the purchasing power of your $20,000.  If I did my annual expense planner and it tells me that I need $50,000 per year in retirement to meet all of my estimated expenses, let’s look at what adjusting that $50,000 for inflation does over different periods of time assuming a 3% rate of inflation:

Today’s Dollars 5 Years From Now 10 Years From Now 20 Years From Now

$50,000         $56,275                  $65,238                    $87,675

In the above example, if I am retiring in 10 years, and my estimated annual expenses in retirement will be $50,000 in today’s dollars, by the time I retire 10 years from now my annual expenses will increase to $65,238 per year just to stay in the same place that I am in today.  Also, inflation does not stop when you retire, it continues into the retirement years. If I am 50 today and plan to live until 90, I have to apply this inflation adjustment for 40 years.  It’s clear to see how inflation can have a significant impact on the amount that you may need to withdrawal for your account to meet you estimated expenses at a future date.

Step 3:  Gather The Information On Your Current Assets

Once you know your expenses, you now need to gather all of the information on your retirement accounts and pension plans.  You should collect the most recent statement for all of your investment accounts (401K, 403B, IRA’s, brokerage accounts, stocks, etc.), pension statements (if applicable), obtain your most recent social security statement, and gather information on the other sources of income and/or assets that may be available when you retire. Such as:

• Sale of a business

• Downsizing the primary residence

• Rental income

• Part-time employment

Step 4:  Project The Growth Of Your Retirement Assets

There are three main categories to consider when calculating the growth rate of your retirement assets:

• Annual contributions

• Withdrawals

• Investment rate of return

For annual contributions, it’s determining which accounts you plan on making deposits too each year and how much?  For most individuals, their employer sponsored retirement plan is the main source of new contributions to their retirement nest egg.   If your employer makes regular employer contributions to your retirement plan, you should factor those in as well.  For example, if I am contributing 8% of my pay into the plan and my employer is providing me with a 4% matching contributions, I would reasonably assume that I’m adding 12% of my pay to my 401(k) plan each year.

The most popular question that we get in this category is “how much should I be contributing each year to my retirement account with my employer?”  We advise employees that they should have a goal of contributing 10% of their pay each year to their retirement accounts.   This is an aggregate total between your personal contributions and the employer contributions.   Even if you cannot reach that level right now, 10%+ is the target.

Let’s move onto the next category…….withdrawals.  Pre-retirement withdrawals from retirement accounts have become much more common in recent years due largely to the rising cost of college education.  Parents will take loans from their 401K/403B plans or take early withdrawals from IRA accounts to fulfill the need for additional income during the years that their children are in college.  If part of your overall financial plan is to use your retirement accounts to pay for one-time expenses such as college, you will need to factor that into your projections.

The third variable to consider when determining the growth of your assets is the assumed annual rate of return on your investments.  There are many items to consider when determining a reasonable annual rate of return for your accounts.  Some of those considerations include:

• Time horizon to retirement

• Allocation of your portfolio (stocks vs bonds)

• Concentrated holdings (10%+ of your portfolio allocated to a single investment)

• Accumulation phase versus distribution phase

The answer to the question: “what rate of return should I expect from my retirement accounts?”, can really only be determine on a case by case basis. Using an unreasonable rate of return assumption can create a significant disconnect between your retirement projections versus what is likely to actually occur within your investment accounts.  Be careful with this step.

Step 5:  Factor In Taxes

Don’t forget about the lovely IRS.  All assets are not treated equally from a tax standpoint.  For most individuals, the majority of their retirement savings will be in pre-tax retirement vehicles such as 401(k), 403(b), and Traditional IRA’s.  That means when you take distributions from those accounts, you will realize earned income, and have to pay tax.  For example, if you have $400,000 in your 401K account and you are in the 25% tax bracket, $100,000 of that $400,000 will be lost to taxes as withdrawals are made from the account.

If you have after tax investment accounts, it’s possible that you may owe little to no taxes on withdrawals.  However, if there are unrealized investment gains built up in your after tax investment accounts then you may owe capital gains tax when liquidating positons.

Also note, you may have to pay taxes on a portion of your social security benefit.   The amount of your social security benefit that is taxable varies based on your level of income.

Step 6:  Spend Down Your Assets

In the final step, you should run long term projections to illustrate the spend down of your assets in retirement.  Here are the steps:Example

• Start with your annual after tax expense number $60,000

• Subtract social security less taxes: ($20,000)

• Subtract pension payments less taxes (if applicable): ($10,000)

• Annual Expenses Net SS and Pensions: $30,000

In the example above, this individual would need an additional $30,000 after-tax to meet their anticipated annual expenses in Year 1 of retirement.  I stress “after-tax” because if all of the retirement assets are in a pre-tax retirement account then they would need to gross up their distributions for taxes to get to the $30,000 after tax.  If it is assumed that $40,000 has to be withdrawn from an IRA each year, the 3% inflation rate is applied to the annual expenses, and the life expectancy of this individual is 20 years from the date that they retire, this individual would need to withdrawal $1,074,814 out of their retirement accounts over the next 20 years to meet their income needs.

Step 7:  Identify Multiple Solutions

There are often times multiple roads to reach a destination and the same is true when planning for retirement. If you find that you assets are falling short of the amount that is needed to sustain your expenses in retirement, you should work with a knowledgeable financial planner to identify alternative solutions.  It may help you to answer questions like:

• If I decided to work part-time in retirement how much would I have to earn?

• If I downsize my primary residence in retirement how does this impact the overall picture?

• If I can’t retire at age 63, what age can I comfortably retire at?

• What are the pros and cons of taking social security benefits prior to normal retirement age

I also encourage clients to spend time looking at their annual expenses.  If you find that your are cutting it close on income versus expenses in retirement, it's usually easier to cut expenses than it is to create more income in the retirement year. 

Michael Ruger

About Michael……...

Hi, I’m Michael Ruger. I’m the managing partner of Greenbush Financial Group and the creator of the nationally recognized Money Smart Board blog . I created the blog because there are a lot of events in life that require important financial decisions. The goal is to help our readers avoid big financial missteps, discover financial solutions that they were not aware of, and to optimize their financial future.

Sample Business Plan

Sample Business Plan

The business plan for a startup business provides entrepreneurs with a guide in creating a business plan and items to consider when starting a new business. 

Click on the PDF link in the green box below. 

Should I Establish an Employer Sponsored Retirement Plan?

establishing an employer sponsored retirement plan

Employer sponsored retirement plans are typically the single most valuable tool for business owners when attempting to:

• Reduce their current tax liability

• Attract and retain employees

• Accumulate wealth for retirement

But with all of the different types of plans to choose from which one is the right one for your business? Most business owners are familiar with how 401(k) plans works  but that might not be the right fit given variables such as:

• # of Employees

• Cash flows of the business

• Goals of the business owner

There are four main stream employer sponsored retirement plans that business owners have to choose from:

• SEP IRA

• Single(k) Plan

• Simple IRA

• 401(k) Plan

Since there are a lot of differences between these four types of plans we have included a comparison chart at the conclusion of this newsletter but we will touch on the highlights of each type of plan.

SEP IRA PLAN

This is the only employer sponsored retirement plan that can be setup after 12/31 for the previous tax year. So when you are sitting with your accountant in the spring and they deliver the bad news that you are going to have a big tax liability for the previous tax year, you can establish a SEP IRA up until your tax filing deadline plus extension, fund it, and take a deduction for that year.

However, if the company has employees that meet the plan's eligibility requirement, these plans become very expensive very quickly if the owner(s) want to make contributions to their own accounts. The reason being, these plans are 100% employer funded which means there are no employee contributions allowed and the employer contribution is uniform for all plan participants. For example, if the owner contributes 15% of their income to the SEP IRA, they have to make an employer contribution equal to 15% of compensation for each employee that has met the plans eligibility requirement. If the 5305-SEP Form, which serves as the plan document, is setup correctly a company can keep new employees out of the plan for up to 3 years but often times it is either not setup correctly or the employer cannot find the document.

Single(k) Plan or "Solo(k)"

These plans are for owner only entities. As soon as you have an employee that works more than 1000 hours in a 12 month period, you cannot sponsor a Single(k) plan.

The plans are often times the most advantageous for self-employed individuals that have no employees and want to have access to higher pre-tax contribution levels. For all intents and purposes it is a 401(k) plan, same contributions limits, ERISA protected, they allow loans and Roth contributions, etc. However, they can be sponsored at a much lower cost than traditional 401(k) plans because there are no non-owner employees. So there is no year-end testing, it's typically a boiler plate plan document, and the administration costs to establish and maintain these plans are typically under $400 per year compared to traditional 401(k) plans which may cost $1,500+ per year to administer.

The beauty of these plans is the "employee contribution" of the plan which gives it an advantage over SEP IRA plans. With SEP IRA plans you are limited to contributions up to 25% of your income. So if you make $24,000 in self-employment income you are limited to a $6,000 pre-tax contribution.

With a Single(k) plan, for 2021, I can contribute $19,500 per year (another $6,500 if I'm over 50) up to 100% of my self-employment income and in addition to that amount I can make an employer contribution up to 25% of my income. In the previous example, if you make $24,000 in self-employment income, you would be able to make a salary deferral contribution of $18,000 and an employer contribution of $6,000, effectively wiping out all of your taxable income for that tax year.

Simple IRA

Simple IRA's are the JV version of 401(k) plans. Smaller companies that have 1 – 30 employees that are looking to start are retirement plan will often times start with implementing a Simple IRA plan and eventually graduate to a 401(k) plan as the company grows. The primary advantage of Simple IRA Plans over 401(k) Plans is the cost. Simple IRA's do not require a TPA firm since they are self-administered by the employer and they do not require annual 5500 filings so the cost to setup and maintain the plan is usually much less than a 401(k) plan.

What causes companies to choose a 401(k) plan over a Simple IRA plan?

• Owners want access to higher pre-tax contribution limits

• They want to limit to the plan to just full time employees

• The company wants flexibility with regard to the employer contribution

• The company wants a vesting schedule tied to the employer contributions

• The company wants to expand investment menu beyond just a single fund family

401(k) Plans

These are probably the most well recognized employer sponsored plans since at one time or another each of us has worked for a company that has sponsored this type of plan. So we will not spend a lot of time going over the ins and outs of these types of plan. These plans offer a lot of flexibility with regard to the plan features and the plan design.

We will issue a special note about the 401(k) market. For small business with 1 -50 employees, you have a lot of options regarding which type of plan you should sponsor but it's our personal experience that most investment advisors only have a strong understanding of 401(k) plans so they push 401(k) plans as the answer for everyone because it's what they know and it's what they are comfortable talking about. When establishing a retirement plan for your company, make sure you consult with an advisor that has a working knowledge of all these different types of retirement plans and can clearly articulate the pros and cons of each type of plan. This will assist you in establishing the right type of plan for your company. 

Michael Ruger

About Michael.........

Hi, I'm Michael Ruger. I'm the managing partner of Greenbush Financial Group and the creator of the nationally recognized Money Smart Board blog . I created the blog because there are a lot of events in life that require important financial decisions. The goal is to help our readers avoid big financial missteps, discover financial solutions that they were not aware of, and to optimize their financial future.

Paying Down Debt: What is the Best Strategy?

strategies for paying off debt

Living with debt is not easy. It can be a constant burden and easily disrupt day-to-day life. Having debt will also ruin your credit score too. The worse your credit score gets, the less likely you will be accepted for any type of loan.  One of the fastest ways to get rid of your debt is to pay your debt off in the correct order.

STEP 1: Create a list of all your current debts

The first step is understanding what you owe. To start, make a master list of all your monthly credit card and loan statements. For each bill, include:

• The creditor's name

• The total amount you owe on that bill

• The minimum required monthly payment

• The interest rate (also known as APR)

• The payment due date

STEP 2: List all of your monthly expenses

Add up all your monthly expenses: rent, car, food, utilities, health insurance and the minimum payments on your debts; as well as regular spending on things such as entertainment and clothing. Subtract that figure from your monthly after-tax income. The remaining amount is what you could put toward debt repayment each month-though it may make sense for you to save some.

STEP 3: Call your lenders

Call your lenders and explain your situation. They may be willing to lower your interest rate temporarily or waive late fees. You may also be able to lower your interest rate by transferring some high-interest credit card debt onto a new credit card with a lower rate (though that's not a long-term solution).

STEP 4: Payoff high interest rate or small balances first

You can start with the bill carrying the highest interest, or the one with the smallest balance. Prioritizing the highest-rate debt can save you more money: You pay off your most expensive debt sooner. Paying off the smallest debt can eliminate a bill faster, providing a motivating boost. Whichever you choose, make sure to pay at least the minimum on all your debts.

credit card debt

Pay the monthly minimum on each debt. The exception: your target bill. Put more money toward this one to pay it down faster. Once you pay off that bill, choose another to pay down aggressively. Your monthly debt repayment total shouldn't change, even when you eliminate bills. This way you gain momentum as you go, putting more and more money toward each remaining bill.

STEP 5: Get creative

You can use your annual tax refund or holiday bonus to pay down debt. Look for small ways to save money every day, such as riding your bike to work, or eating in instead of dining out. Another way to make a dent quickly is to sell unused or unnecessary belongings-maybe downgrading your car to a more affordable model with lower monthly payments.

STEP 6: Break the cycle

As you start to escape debt, it can be tempting to reward yourself by splurging on a new smartphone or an expensive dinner but just a few purchases can erase all your hard work. Instead, buy things with cash or your debit card, and think long and hard before taking on any new debt.

Read this book

If you want to live a debt free life, I strongly recommend you read the book "Total Money Makeover" by Dave Ramsey. Ramsey's book really paves the way to get out of debt and stay out of debt.

dave ramsey book

Michael Ruger

About Michael.........

Hi, I'm Michael Ruger. I'm the managing partner of Greenbush Financial Group and the creator of the nationally recognized Money Smart Board blog . I created the blog because there are a lot of events in life that require important financial decisions. The goal is to help our readers avoid big financial missteps, discover financial solutions that they were not aware of, and to optimize their financial future.

Simple IRA vs. 401(k) - Which one is right for your company?

compare simple ira and 401k

There are a lot of options available to small companies when establishing an employer sponsored retirement plan. For companies that have employees in addition to the owners of the company, the question is do they establish a 401(k) plan or a Simple IRA?The right fit for your company depends on:

• What are the company's primary goals for establishing the plan?

• How much the owner(s) plan to contribute to the plan?

• How many employees does the company have?

• Do you want to restrict the plan to only full time employees?

• The cost of maintaining each plan?

• Does the company intend to make an employer contribution to the plan?

• Diversity of the investment menu

Below is a chart that contains a quick comparison of some of the main features of each type of plan:

simple ira vs 401K comparison chart

For many small companies it often makes sense to start with a Simple IRA plan and then transition to a 401K plan as the company grows or when the owner intends to start accessing the upper deferral limits offered by the 401(k) plan.

Simple IRA's are relatively easy to setup and the administrative fees to maintain these plans are typically lower in comparison to 401(k) plans. Most Simple IRA providers will only charge $10 - $30 to custody the accounts.

By comparison, 401(k) plans are ERISA covered plans which require a TPA Firm (third party administrator) to maintain the plan documents, conduct year end plan testing, and file the 5500 each year. The TPA fees vary based on the provider and the number of employees eligible to participate in the plan. A ballpark range is $1,500 - $2,500 for companies with under 50 employees.

However, the additional TPA fees associated with establishing a 401(k) plan may be justified if:

• The owners intend to max out their employee deferrals

• The owners are approaching retirement and need to make big contributions

• The company wants to maintain flexibility with the employer contribution

• The company would like to make Roth contributions, loans, or rollovers available

WARNING: Most investment providers are "one trick ponies". They will talk about 401(k) plans and not present other options because they either do not have a thorough understand of how Simple IRA plans work or they are only able to offer 401(k) plans. Before establishing a retirement plan it is important to work with a firm that presents both options, helps you to understand the difference between the two types of plans, and assist you in evaluating which plan would best meet your company's goals and objectives.

Michael Ruger

About Michael.........

Hi, I'm Michael Ruger. I'm the managing partner of Greenbush Financial Group and the creator of the nationally recognized Money Smart Board blog . I created the blog because there are a lot of events in life that require important financial decisions. The goal is to help our readers avoid big financial missteps, discover financial solutions that they were not aware of, and to optimize their financial future.

How to Create a Business Plan

How to Create a Business Plan

Starting your own business can be an exciting and rewarding experience. It can offer numerous advantages such as being your own boss, setting your own schedule and making a living doing something you enjoy. But, becoming a successful entrepreneur requires thorough planning, creativity, and hard work. After making the decision to start your own business, you'll need to be realistic about the sort of goals and targets you want to achieve at first. Businesses need targets though, so be sure to set some.  Meeting targets does usually indicate business growth and success, so that's why they are so important. As with any business though, it all starts with a solid plan...

Learn from those before you

Before you make the leap to start your own business, make sure you talk or work for the person that you want to be 5 years from now. Working in the industry before taking your leap of faith will most likely increase your success rate. On the surface some businesses seem simple and straight forward. No business ever is. You have to figure out how the successful companies in that industry currently make money, what are their margins, who are the customers, who are the competitors, and more importantly what are the missteps that you should avoid when building you own business.

You must be able to answer these questions

1. Why am I starting a business?

2. What kind of business do I want?

3. Who is my ideal customer?

4. What products or services will my business provide?

5. Am I prepared to spend the time and money needed to get my business started?

6. What differentiates my business idea and the products or services I will provide from others in the market?

7. Where will my business be located?

8. How many employees will I need?

9. What types of suppliers do I need?

10. How much money do I need to get started?

11. Will I need to get a loan?

12. How soon will it take before my products or services are available?

13. How long do I have until I start making a profit?

14. Who is my competition?

15. How will I price my product compared to my competition?

16. How will I set up the legal structure of my business?

17. What taxes do I need to pay?

18. What kind of insurance do I need?

19. How will I manage my business?

20. How will I advertise my business?

Do not spend a dime until you can clearly answer all of these questions otherwise you are leaving your fate to chance.

Write your business plan

Your business plan is your roadmap to success. Business plans typically forecast out 3 to 5 years. Any shorter than that and you will have no idea where you are going with the business. Any longer than that is irrelevant because you may need to make material adjustments to your plan within the first 3 years as obstacles present themselves and as the competitive landscape changes along the way. Here are the key elements that you will want include in your business plan:

Executive Summary: Your executive summary is a snapshot of your business plan as a whole and touches on your company profile and goals. Read these tips about what to include.

Company Description: Your company description provides information on what you do, what differentiates your business from others, and the markets your business serves.

Market Analysis: Before launching your business, it is essential for you to research your business industry, market and competitors.

Organization & Management: Every business is structured differently. Find out the best organization and management structure for your business.

Service or Product Line: What do you sell? How does it benefit your customers? What is the product lifecycle? Get tips on how to tell the story about your product or service.

Marketing & Sales: How do you plan to market your business? What is your sales strategy? Read more about how to include this information in your plan.Funding Request: If you are seeking funding for your business, find out about the necessary information you should include in your plan.

Financial Projections: If you need funding, providing financial projections to back up your request is critical. Find out what information you need to include in your financial projections for your small business.

Your Competitive Advantage: What makes your business unique? Determining this could help you stand out from the crowd and give you advantages over your competitors.

Appendix: An appendix is optional, but a useful place to include information such as resumes, permits and leases. Find additional information you should include in your appendix.

Surround yourself with a great team of advisors.

Most business should have an accountant to ensure your books are correct and that all of the money your business is involved with is accounted for. You will collaborate with an attorney.  You will also need a financial advisor. they will provide you with advice on where you can spend more money, what do you need to keep back or whether you need to reduce the money your spending on marketing for example. These professionals will help you to get your business established and help you with the key decisions that need to be made when you are establishing a business for the first time.

• How should I incorporate?

• What business expenses can I deduct?

• How much cash do I need to sustain my business on a monthly basis?

It is likely that many of these professionals will be working with a client in your industry so they can provide you with real world guidance on the pros and cons of the decisions that you have to make.

Rule #1: Make sure you trust and like who you are working with. Do not just select a firm because they have a big name or because your friend uses them. You are going to be busy building your business so you will rely heavily on your team of professional advisors to make sure from a legal, tax, and financial standpoint that you are maximizing your resources.

Michael Ruger

About Michael.........

Hi, I'm Michael Ruger. I'm the managing partner of Greenbush Financial Group and the creator of the nationally recognized Money Smart Board blog . I created the blog because there are a lot of events in life that require important financial decisions. The goal is to help our readers avoid big financial missteps, discover financial solutions that they were not aware of, and to optimize their financial future.

The Shift from Defined Benefit to Defined Contribution Plans

The Shift from Defined Benefit to Defined Contribution Plans

As defined benefit plans continue to become a thing of the past and workers realize they will not have a pension (and possibly Social Security) to rely on during retirement, it is important to be educated on the investments and opportunities available in employer sponsored defined contribution plans. This newsletter will briefly discuss the difference between defined benefit plans and defined contribution plans, why the dramatic shift from one to the other, and why it is important to be educated on retirement and the investment options available.

Defined Benefit Plans

Defined benefit plans (commonly referred to as pension plans) are promises made by an organization to pay a specific amount, usually monthly, to an employee during retirement. These amounts are calculated based on a number of factors including an employees earnings history, service, and age. Since the organization is responsible for funding these plans during an employee’s retirement, investment returns are the concern of the organization, not the employee.

Defined Contribution Plans

Rather than an employer guaranteeing a benefit during retirement as is the case with defined benefit plans, the employee (and often times the employer) will make contributions to a defined contribution plan which accumulates over time and is drawn upon by the employee during retirement. One of the most common forms of defined contribution plans available to workers is the 401(k) plan. Since the guarantee of a monthly benefit during retirement is not there in a 401(k) plan, whatever is accumulated from employee/employer contributions and investment returns over the years is what will be available to the employee throughout retirement. In other words, this is the amount that must last throughout retirement.

Why the shift to 401(k)s and other defined contribution plans?

Defined benefit plans were set up to reward employees with consistent income during retirement since they are no longer earning. This is a great benefit to employees if available but these plans are becoming obsolete. As baby boomers continue to retire and live longer than previous generations, defined benefit plans are becoming too expensive to fund.

It is extremely difficult for companies (and municipalities) to turn a profit when they continue paying employees twenty years after their last day. Think of a defined benefit plan like you would a bad contract in baseball. Let me use one of the most scrutinized contracts in baseball history as an example. The Mets contract with Bobby Bonilla.

The last time Bonilla had an at bat for the Mets was in 1999, yet in 2015 he received a check for $1.19 million dollars. That amount is more than 17 of the current 25 players will make in 2015. Not the best business model when you are paying that kind of money to a player that hasn’t filled a seat (generated income for a company) in 15 years. The payment is guaranteed to Bonilla through 2035, which can be compared to a worker retiring at 55 and receiving a guaranteed payment for life.

For the reasons that seem obvious now, the past 30 years has seen a dramatic shift from defined benefit plans to defined contribution plans.

This chart illustrates the shift noted above. The breakeven point is shown around 1990 with no signs of the trend reversing.

As of June 30, 2014, 401(k) plans held an estimated $4.4 trillion in assets which is compared to $2.2 trillion in 2004.

Savings and Investment Performance

So, with less retirees having a pension plan to rely on for consistent income throughout retirement, how well are people preparing for retirement? The USA Today released an article in March 2015 titled “For millions, 401(k) plans have fallen short”, which describes the lack of retirement savings and inability for the majority of retirees to maintain their current lifestyle during retirement. The article references a report issued by the Employee Benefit Research Institute that stated the median amount in 401(k) savings accounts is $18,433. The median is higher for older employees as Vanguard 401(k) accounts for savers age 55 to 64 was $76,381 in 2013.

The Social Security website calculates life expectancy and determined that a man reaching age 65 today is expected to live until 84.3 years old (86.6 years old for women). That being said, an employee expecting to retire at age 65 with less than $100,000 in retirement savings has to live off that and social security for 20 plus years. The shift in retirement has led to many retirees not enjoying the retirement they had once planned.

As mentioned earlier, the migration from defined benefit plans to defined contribution plans has led to employees being responsible for managing their retirement. It is apparent that the savings rate for the average employee has not been sufficient to fund retirement, so now let us look at how employees are performing compared to major asset classes.

Contributions are only one part of a 401(k) balance with the other being interest earned. The chart above shows how the average investor has performed compared to different asset classes over the past 20 years. The 2.5% earned by the average investor was only .1% higher than inflation. This essentially means that in real dollars the average investor did not have any earnings during this period.

We typically look at the S&P 500 when determining how the stock market is performing which was up 9.9% over the same period. The other highlighted bar in the graph shows a portfolio with 60% in stocks and 40% in bonds, which is more of a conservative allocation but still saw an increase of 8.7%. When participating in a 401(k) for 20, 30, or 40 years, the majority of the balance when approaching retirement is not the contributions made but the interest that has compounded over an extended period of time. Losing 6-8% annually has a dramatic impact on an account, especially over a 20 year period.

This chart shows the impact of lost earnings over 40 years. In the example, the investor makes an initial investment of $10,000 earning 0%, 2%, 5%, and 8% annually with no additional contributions. Two quick takeaways are the interest that compounds at 5% and 8% are much more than the initial investment and after 20 years the difference between 5% and 8% is almost double.

Taking Control Of Your 401(k)

As defined contribution plans continue to takeover as the main income vehicle for retirees, how can employees benefit and take advantage of the available resources from these plans?

Start contributing as soon as possible - As shown earlier, the interest that compounds in a retirement account makes up the majority of the balance when invested for an extended period of time. The sooner you can start contributing the longer the account has to grow and the need to play catch-up as you approach retirement may be avoided. Also, you will be less reliable on the dollars being contributed as you are not used to the income each pay period.

Take advantage of the employer match - If your employer is generous enough to offer a match, take advantage of it. For example, you make $50,000 a year and your employer matches up to 3% of your compensation. This means that you can contribute $1,500 of pre-tax money and automatically double your investment. That is a 100% return just for participating in the plan.

Use the available resources - If your plan has a financial advisor, sit down with him or her and discuss your retirement goals and how to invest your contributions. The reason the average investor performs so poorly compared to the indexes is because they try to time the market and when they pull out they are reluctant to get back in. Discuss your time horizon and risk tolerance with your advisor and let them allocate your investments in a way that makes sense.

It is important to be educated, and historically, investors do not benefit over longer periods if they try to beat the market. JP Morgan put out a study that showed an investor who missed the 10 best days in the stock market from 1994-2014 earned a little more than half of an investor who was fully invested during the same period. If you have a long time horizon, it is important to hold through the ups and downs as historically the stock market goes up over long periods. For most investors, 10-15 years from retirement is when participants should start reassessing their allocation and determine if it is still the appropriate position for them.

Final Thoughts

As money continues to pour into defined contribution plans, it is important that the public be educated on what this means for retirement. Now more than ever it is up to employees to take responsibility for their retirement and save enough to last as defined benefit plans become obsolete and Social Security needs an overhaul that no one will touch. 

About Rob……...

Hi, I’m Rob Mangold. I’m the Chief Operating Officer at Greenbush Financial Group and a contributor to the Money Smart Board blog. We created the blog to provide strategies that will help our readers personally , professionally, and financially. Our blog is meant to be a resource. If there are questions that you need answered, pleas feel free to join in on the discussion or contact me directly.