Enjoy this week’s guest post from Dawn Santoriello, a Certified Financial Planner, with some advice for small business owners on a piece that could possibly be missing from your retirement plan!
As a small business owner, you know the value of saving for retirement. Planning for your financial security is left solely up to you. You don’t have the benefit of your employer putting money away for you. The sooner you implement a plan the better. Time flies when you are running your own business and tomorrow comes faster when you think. Put yourself first. The day to start saving for retirement is the day you open your business. Even if it’s only $100 a month. It’s something.
Put yourself first. The day to start saving for retirement is the day you open your business. Share on XI believe you need to have two buckets of money in retirement: a risk bucket and a safe money bucket. Let’s talk about the safe bucket. As a small business owner, you have a few different retirement plans options to choose from but the one that is the least mentioned is whole life insurance. Oh no I said the 3 dirty words. Most people don’t like life insurance because they don’t understand it. As a small business owner, it is to your benefit to understand it.
Whole life insurance is similar to a ROTH IRA, but even better because you don’t have the income or contribution limit restriction. Both allow for after-tax contributions, tax-deferred growth, and tax-free distribution.
In the year 2020 if you are single you are not able directly to contribute to a ROTH IRA if you make more than $124,000. For married couples filing jointly the income limit is $196,000. You can only contribute $6,000 a year, or $7,000 a year if you are over age 50. Life insurance policies can be structured to accept more than this which can help if you are trying to catch up and build savings before you retire. This is considered your safe bucket because it has guaranteed cash values and is not subject to market volatility like a ROTH IRA would be if it is invested in the market.
Life insurance provides a tax-free death benefit as well as accelerated benefits that can be used for a long-term care need. You also have the option of having the premiums paid by the life insurance company if you become disabled. You have access to your cash value should you need it before retirement without penalty. The ROTH IRA has restrictions on when and how you can get you money out of the ROTH IRA.
What would this plan look like? Here is an example of a 41-year-old female, non-smoker, standard rating. Standard is the health rating. It could be a better health rating, but I wanted to be conservative in my example. She puts in $10,000 a year in premium to age 65 (21 years) then the policy is contractually paid up. The death benefit is $496,267 which continues to grow. The cash value at age 65 is $319,297 and death benefit that is $681,297 which will decrease when she draws income, but she will still have a death benefit. She draws a yearly income of $24,691 from age 70 to 90 (21 years). That is $518,511 but she only paid $240,000 in premiums and no market risk! Combine this with your risk bucket and you have a nicely funded retirement plan with options. For example, if the market is having a down year you don’t want to draw from that account. If you own life insurance, you can let your investment account recover and take the money from the whole life insurance. How is that for peace of mind?
Dawn Santoriello is CERTIFIED FINANCIAL PLANNER™ and founder and CEO of DS Financial Strategies. Dawn is focused on empowering women, couples, and entrepreneurs across the United States to reach their financial goals with peace of mind. As a financial entrepreneur, speaker and author, Dawn has refined her expertise and is able to quickly evaluate personal goals and provide relevant advice on how to meet financial goals. She is dedicated to inspiring clients to pair their passions with understanding and to remove financial and emotional barriers that can be blinding to achieving their goals. She has been featured in Forbes, MarketWatch, and The Philadelphia Inquirer. You can connect with Dawn at www.dsfinancialstrategies.com or find her Financial Fridays with Dawn! on her YouTube channel,