Retirement is never urgent until...

If you’re like many people, your retirement savings have not been growing consistently over the years. We’re not referring to the wild fluctuations in the stock market, but rather the fluctuations in our short-term needs. Every once in a while, it just seems like a good idea to yank ALL those retirement savings out and pay for something.

You might need to pay for a down payment. You might need to pay off some credit card debt that’s nagging at you. You might want to ‘bugger off to Europe’ as Rick did some years ago. You know it’s not a good idea financially, but you do it anyway. Retirement savings are not designed to bail us out when we need this kind of short-term cash infusion but if it’s there…

As financial advisors, we have our ideals. Ideally, you should put retirement funds away and ‘leave it there’. Ideally you should never touch it at all, even when you retire! Why? Because it is the ‘earnings’ from the nest egg that you should be using, never the principal. As we heard one person suggest recently, your principal is like your ‘goose’, and you never kill the goose, because then you’re eliminating all those future ‘golden eggs’ (interest/earnings) it will lay.

As financial advisors, one way we try to prevent people from yanking out their retirement savings is by ensuring there are other ‘short-term’ funds available for emergencies. These are meant to act as a buffer zone against the yankers. It helps, but it doesn’t always work.

One problem is that a distant retirement will never be more urgent than the current cash demands you have. It’s impossible. How can long-term demands be more urgent than a current crisis? So what stops you from yanking out those retirement funds? Their convictions? Simple arithmetic? A more viable alternative?

When a client is bent on yanking out their retirement savings to pay off, for example, some credit card debt, telling them how much they’re going to lose in retirement income in 25 years time doesn’t seem to work. Even telling them how much the tax bill is going to be next year can pale in comparison to the relief the person is seeking from the anxiety over their current debt crisis.

So, the question is how can we provide ‘relief’ and still keep the retirement funds intact? Look at a debt consolidation loan? Review the person’s cash flow and create a debt repayment program? Maybe this will work for a minority of people. In the real world, when people are looking for relief, however, they are looking for relief NOW!!! The easiest way is to yank to retirement funds and be done with it.

So, in the moment, when you are in a cash crunch and seemingly have no other place to go, you will yank your retirement savings. Unless you have anticipated the problem and ‘pre-decided’ that under no circumstances will you access your retirement savings. In this way, you will do a pre-emptive strike on bad financial moves. Further, you will be cognizant of putting yourself into situations where you might risk those long term savings.

The alternative is to invest long-term, make progress, encounter a short-term cash crunch, yank out your retirement funds, survive the problem, invest long-term again, make progress, encounter yet another short-term cash crunch, yank out your retirement funds to get relief…

If you’re locked into an investment cycle like this, your retirement savings have not been growing consistently over the years, and it’s not just the market.

Rick Hoogendoorn has been in the financial services business since 1991. Cheri Crause is a certified financial planner in Victoria, BC. .
www.chericrause.com
rick.hoogendoorn@shaw.ca

The American Jobs Creation Act of 2004 imposed strict new rules on non-qualified deferred compensation plans. Beginning in 2005, deferred compensation programs that are not in compliance with the new rules may be taxed as wages, slapped with a 20% excise tax, plus charged an interest penalty.

Given the potentially huge tax consequences for non-compliance with the rules, you should consult with your organization’s benefit specialist and your tax professionals to figure how your compensation might be affected by these new rules.

Deferred compensation plans are often used to provide for the deferral of salary, incentive compensation (i.e., commissions or bonuses), or supplemental compensation for top executives, independent corporate directors, and individual board members. The new rules apply to nonqualified deferred compensation plans at taxable and tax-exempt organizations.

An option for independent corporate directors and individual board members who receive 1099 income for their services may consider is to freeze their nonqualified plan and adopt a qualified plan such as the “one person defined benefit plan”, called the Solo-DB Plan. Qualified retirement plans are exempt from the requirements of the American Jobs Creation Act.

The Solo-DB plan allows the highest deductible contributions possible in a qualified retirement plan. For example in 2005 one can contribute up to $170,000 of compensation into a tax-deferred Solo-DB plan.

Defined benefits plans have been around for a long time. But, recent pension legislation has raised the contribution and deductibility limits as well as simplified plan fund requirements. Thus, defined benefit plans like Solo-DB have become much more attractive to upper-income individuals with self-employment income. The Solo-DB plan will allow you to aggressively fund your retirement while cutting your taxes significantly.

Individuals who qualify for the Solo-DB plan include sole proprietors, independent contractors, and small business owners age 45 or older who can contribute more than $41,000 annually to the plan for at least three years.

For more about Solo DB plans visit Lamaute Capital at: http://www.InvestSafe.com.