reasons to retire and start a business

Reasons to Pursue Entrepreneurship in Retirement

Filling the time retirement allows is never the same for everyone. For some the relaxation is important and long overdue. Others may struggle to fill that free time, even with travel or hobbies. To feel fulfilled starting a new business may be just what your retirement lifestyle needs. The following are reasons starting a business in retirement may help you:

Staying Active

Unfortunately, within ten years of retirement retirees begin experiencing significant health issues such as heart disease, depression, or arthritis. Staying active is a good way to combat health declines. Starting a new business keeps you exercising daily—be it running errands, learning new skills, and attending networking events like conferences or local flea markets.

Sociability

Strong social ties are key for aging adults and leaving your workplace may reduce most of the social interactions you received. And unfortunately, retirees are reported to be the loneliest group. Starting a new business may replenish some of those interactions as you run more errands, take classes, attend local sale events. You should even consider the online communities!

Mental Alertness

The saying goes “always a child at heart,” right? Exercise is important for your brain, too. When you become more stationary you become less engaged mentally, too. Keeping up with mental activity reduces the risk of cognitive illnesses like dementia and Alzheimer’s. What better way to do this than learning new skills to run your business?

Passion

Goals and dreams do not stop once you retire. On top of already having physical, mental, and social benefits, studies confirm that having a purpose leads to longer, happier life. Since you have more time on your hands, few obstacles stand in your way of turning a hobby since as crocheting or pottery into a business.

Supplemental Income

Oftentimes after retirement retired CPAs experience a reduced means of income. Your small business would act as income. Whether it be you start your own part-time firm or you repurpose your skills and teach them to others, there are many ways to continue using your CPA knowledge to boost a new business in retirement.

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Retirement & Cryptocurrency

What You Need to Know About Cryptocurrency and Your Retirement

Started as a small project, cryptocurrency has become a large and continuously growing part of the finance industry. These blockchain tokens are making way into retirement planning slowly. Recently, some major companies have opened their doors to cryptocurrency as an investment option. If you are considering cryptocurrency for your retirement planning, you need to know the risks that come with crypto assets.

It is no secret that the crypto ecosystem is fickle, and in retirement planning it is important to monitor and reduce risk so your assets last 20-40 years. However, cryptocurrency may offer retirees a solid diversification option.

The Newest of New Paradigm

While trends have been observed, analysists are still studying the ups and downs of the cryptocurrency ecosystem. Some experts will say that it is too risky to invest while others will say by not investing you are losing out even with the rules still being written and changing often. Cryptocurrency may offer diversification to your retirement portfolio. The risk lies within your decision to invest or not.

Market Volatility

You are likely very familiar with the success story of Bitcoin and Ethereum. Just this year alone cryptocurrencies have fluctuated significantly. In 2021, Bitcoin dropped $30,000 in value within 3-months.

New Cryptos Launched Often

There are over 13,5000 cryptocurrencies in existence. Some are considered overvalued, others undervalued, and others are predicted to be “just right” for long-term investments. But there are new cryptocurrencies added on the market daily, so when investing choose wisely.

Traditional Accounts & Crypto

Only a few plan sponsors allow for cryptocurrency to be invested in for retirement. There are options under cryptocurrency such as Bitcoin IRA or Bitcoin 401(k). You may rollover funds into a self-directed IRA that allows crypto investments if you qualify. Please note, a lot of the cryptocurrency ecosystem is not government regulated and poses greater risk than typical market stocks and investments.

Taxes & Recording

Record keeping is very important within cryptocurrency gains and losses. Within the USA, cryptocurrency is taxed the same as any other gain or losses on stock for long-term and short-term. However, the recordkeeping and reporting are not as established as with regular trade assets. It is primarily on you to keep accurate records.

The Exchanges & Brokerages

Cryptocurrency is traded on a crypto exchange mostly, but you can trade through a broker. While more expensive, brokers are often much less confusing. Purchasing directly on the exchange can get complicated fast.

At-Risk for Hacking & Theft

Unfortunately, being unregulated means cryptocurrencies are not as protected. There is a greater risk for theft and hacking. Heedless of your storage method—keep investment in the exchange, use external storage device, or store offline—there is a need to have extra precautions in place.

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How ready for retirement are you?

Quick Check: How Ready for Retirement are You?

Retirement readiness is not an overnight success story. It is not a simple formula either. It takes dedication, hard work, and good strategies. Why? Because it is simply not just retirement savings. Below is a quick check to assess your readiness for your golden years whether you are 5-10 or even a year away from retirement!

Financial Wellbeing

As the biggest stressor of retirement, financial wellbeing is budgeting, savings, income streams, and planning. Here are some categories to review for your retirement planning

  • Housing, including utilities and maintenance
  • Healthcare costs (covered later)
  • Daily living: food, transportation
  • Entertainment and travel

Having an idea of where you stand now will help determine how much you should have for retirement assets.

Emergency Fund

Planning for the unexpected helps immensely when it comes to retirement readiness. When there is financial uncertainty, the emergency fund is the perfect security blanket. Advised to be kept separate from normal savings, the emergency fund should have roughly 3-6 months of living costs.

Debt Elimination

The less debt you need to pay in retirement, the better off you will be. Retires are often relying on fixed income streams, so beginning a repayment strategy now while you are still working would be ideal. If you can, paying down debts with higher interest rates would save a lot of money for you down the road.

Retirement Needs
As a CPA, knowing what you need and how you want to life your retirement helps set realistic goals and plans. This should include where you want to reside, what age you plan to retire, and even length of retirement. With longevity increasing by the day, it is estimated that retirement will last between 20-40 years for many. While evaluating your needs, this is a great time to also compose a timeline for when certain benefits/income streams begin.

Healthcare & Insurance

Health insurance is a major factor for retirement, and unfortunately will be the biggest expense you will face in retirement. Not including long-term care, a newly retired couple will need a minimum of $300,000 for medical expenses alone. This number is predicted to increase yearly, too. Moreover, should you have a long-term care event, without coverage, you are looking at approximately another $140,000 annually.

Now part of health care costs is insurance. Medicare only covers so much, and that depends on the plans you go with. Other than Part A each Part or supplemental plan has a premium. You may need prescription drug coverage, which is where Part D of Medicare may help. Consider a supplemental plan under Part C. Do further research into what a private health insurance company may offer so you know what options you have and are able to get the best price for what you need. Long-term care insurance is another premium monthly, but it would help a lot should you need it. There are some options where you may add a rider to a life insurance policy to help cover the costs long-term care would entail.

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Staying connected while retirement to the cpa community

CPAs: Want to Stay Connected to the Profession in Retirement?

There’s a fork in the road when it comes to retirement. You leave behind your career to begin a new fulfilling chapter in life, but how do you fill your time? Some travel, others spend those years making hobbies a lifestyle or help raise their grandchildren. However, what if you aren’t quite ready to step away from the financial field but want the flexibility retirement offers?

You could consider remote work or meeting new people and learning new things! Or maybe the goal is just to supplement your retirement income streams. Now, consider when you are working in retirement there may be additional tax or Social Security risks involved.

The following are great ways to stay connected to the CPA community:

Consulting

Nearing retirement means that you are typically looking for a part-time gig with likely not as much demand as a full-time job. Fortunately, a lot of businesses, even CPA firms, are always looking for financial professionals with experience. Having the skills from your working years means that you are fit for the job. Plus, consulting gigs are not demanding, offer great flexibility, and create a stable stream of income.

Contract jobs

Want something like a consulting gig, but only seasonally? Contract assignments are an option! These could include only working during the tax season or doing seasonal bookkeeping. Contract jobs are much more common for experienced workers than entry-level positions.

Teaching

If you wish to do something related to the field, but not quite the same, consider teaching. Many four-year universities and community colleges are looking to hire professors. You may even be able to offer training services through businesses. Another great teaching opportunity is tutoring, and this can be done at a college or even high school level. Luckily, moreover, this can be done in-person or even online. Some virtual services offer great passive income opportunities!

Research

Since you spent most of your life practicing patience and have a sharp eye for detail, those skills would make you a great researcher. Be it with finance or another field, gathering and organizing data is something you could still do, even part-time. Research into your local universities, get in contact with your network, and see if anyone is looking for research help. You might like it!

Grant writing and administration

Putting together grant applications utilizes the skills you have mastered as a CPA. You help write the grant and then if the money is funded you can help manage and track the funds or project. Stepping into grant writing and administrative work uses your knowledge of bookkeeping, tax legislation, and project management. You easily become and asset to their team (and sometimes these are offered as contract gigs)!

Your retirement years do not have to be spent completely giving up what you love, what you have done for so long. There are new ways to keep yourself in the field especially as the digital and virtual world expands! You may even find a new passion.

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Understanding Financial Independence, Retire Early (FIRE)

Brought to light from the 1992 book Your Money or Your Life by Vicki Robin and Joe Dominquez, the Financial Independence, Retire Early (FIRE) community was born as a movement that analyzes spending in terms of working hours as the ‘payment.’ For example, if your hourly pay is $12, a tube of toothpaste at $4 is 20 minutes of work. Being founded on the extreme frugality of spending, the movement is heavy on saving and investing, too.

With their dedication to saving and investing, FIRE followers aim to retire decades before 65. Those within the community typically work to save, invest that money, and when their assets are about their 25-30 times their projected annual expenses, will retire fully in their 30s or 40s. Some may work part-time. To maintain their desired lifestyle, FIRE folks will withdraw 3-4%. There have been various FIRE perspectives come to life since its rise in 1992 depending on lifestyle needs. The core three are as following:

  • Fat FIRE – This style takes aggressive savings and investment strategies and is more suitable for those with larger incomes than the average worker. Oftentimes this is the FIRE lifestyle for someone who does not want to reduce their standard of living.
  • Lean FIRE – With extreme saving and investing methods and a minimalistic lifestyle, the restricted living often has these folks living on $30,000 or less a year.
  • Barista FIRE – As the mid-grounds for Fat and Lean, folks here typically quit their traditional full-time jobs and use a combo of minimalistic living with freelance or part-time work. This is typically to maintain health benefits, support themselves, and not touch their retirement funds.  

More to FIRE than Meets the Eye:

FIRE does not mean entirely quitting work nor does just apply to retiring early. There are many accessible elements that could be applied to your retirement planning and financial health. Planning for your future is the core of the FIRE community. It is about getting better with your money—be it better saving, methodical investing, or intentional spending:

  1. Planning – In 2021, a study showed 25% of Americans did not have a retirement savings at all. Of those, almost 40% felt they would never get on track to have the retirement they want. FIRE emphasizes the importance of planning and saving.
  2. Discipline – To achieve what your plan entails there is a great amount of discipline involved. FIRE is about maximizing your income and minimizing your overall expenses. Setting a budget, strictly sticking to it, creating income streams now and saving.
  3. Invest wisely – Ideally, taking a certain percentage of your monthly income to invest is the idea of FIRE. The money adds up over time and grows. Strategies under FIRE are a little more extreme, encouraging to sometimes invest large amounts than the typical working person.

For further information on FIRE and much more, listen to our podcast episode “F.I.R.E., Side Hustles, and Retirement with the Financial Panther” of The Retirement Risk Show.

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Working Smarter, Not Harder: Leveraging Your Life Insurance Policy

An unconventional strategy for retirement, to maximize your life insurance policy is premium finance. Premium finance is where policyholders will pay substantial premiums via borrowing from a third-party lender—tying up the bank’s money versus your own capital. With some premium finance loans regular payments may begin shortly after the origination of the loan. However, there is a choice to capitalize interest into the arrangement with the expectation that the cash-value growth of the life insurance will outperform the accruing loan interest.

Premium financed life insurance allows the policyholder to purchase significantly more life insurance for a fraction of what is needed to support such a massive policy. This strategy keeps the policyholder’s other assets free to perform and produces an impressively tax-free internal rate of return for seemingly nothing out-of-pocket.

Ideally, the best method for premium financed life insurance polices is to create a compounding snowball effect for the cash value growth. The policy takes on the loan using built-in features. Moreover, it is when and if, the compounding cash value overcomes the hurdle of the premium finance loan’s interest rate. Future policy distributions may become death benefits to heirs, be tax-exempt retirement income, or possibly both.

How does premium financing work?

An affluent or emerging affluent individual with generally good health and a reputable credit rating may apply for a life insurance policy—be it for estate planning or retirement planning. For premium financing to occur, most of these policies will be whole life insurance or indexed-universal due to their stability and ability to offer higher loan-to-value ratio. With strong, long-term performance, the financed insurance policy will be funded at a maximum premium allowance for the first 4-7 years.

Depending on the situation, sometimes the borrower will pay the first premium themselves to avoid the need to post collateral. Often borrowers will involve a 3rd party lender to the larger premiums with the intent to begin interest-only payments directly to the lender. However, to fully capitalize on premium financing, borrowers roll the accruing interest into the loan with the high hopes the cash growth will outdo the finance loan.

This goes to say, the policyholder should prepare for posting collateral. If designed correctly, the life insurance can serve as the collateral due to its cash value growth.

Benefits to Premium Financed Life Insurance Policies:

  1. Ability to keep other assets active and growing.
  2. Replaces need to pay insurance premiums during your high-income working years.
  3. Potential for extremely positive arbitrage between cash value growth and premium finance loan rate.
  4. Potential of tax-exempt retirement income or greater death benefit payout.
  5. More cash value that compounds for you, not against you.

For more information on premium finance benefits and qualifications, listen to The Retirement Risk Show’s “Premium Finance: A Leveraging Method of Life Insurance” episode.

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Self-Employed? Consider Self-Directed Retirement Plans

Self-employment is a beautiful thing. It offers a certain type of freedom, but it adds the stress of having to fund your own retirement unlike an employer providing a traditional 401(k) plan. Depending on your circumstances, certain self-directed plans may fit your business and retirement goals more: Traditional or Roth IRA, Solo 401(k), SEP IRA, or SIMPLE IRA.

Traditional or Roth IRA:

Known as the easiest way to save when self-employed for retirement, an IRA plan allows you to potentially rollover an old 401(k). For traditional IRAs tax deductions are permitted on whatever you contribute. No deductions on Roth IRAs, but you get to enjoy tax-free withdrawals in retirement.

2022 Contribution Limit: $6000 if under 50, $7000 if over 50. (Note: Roth IRAs have income limits so if you make too much you may be ineligible).

IRAs do not have designated employee elements. So, if you are hiring employees, they would have to open their own IRAs.

Solo 401(k):

This plan is best for the self-employed with no employees—and if applicable, a spouse could contribute. A solo 401(k) mirrors a traditional 401(k), but you are the employee and employer.

Let’s break that down. Pretend you are two people. As the employee you can contribute like you would with a standard employer sponsored 401(k) plan. In 2022 that would be whichever is less: up to $20,500 or 100% of your salary deferrals (plus a $6000 catchup if eligible). As the employer, you can make additional contributions, maxing at 25% of income.

Since the plan works like a standard 401(k), you make the contributions are tax-deferred, meaning you are taxed upon withdrawal.

Notes: This plan is great for saving loads of money for retirement. However, these contributions are per person, not per your plan. If you have other employment that offers a 401(k) (or your spouse does if contributing to the solo 401(k)) these contribution limits cover both 401(k) plans.

For more on solo 401(k)s, listen to The Retirement Risk Show episode “The Strategy for Self-Employed.”

SEP IRA:

Having simpler maintenance than a solo 401(k), SEP IRAs are flexible so that you do not have to contribute annually. Self-employed people or business owners with only a few employees benefit the most from this plan. Although no catchup contribution, SEP IRAs have the same contribution limits are solo 401(k)s: lesser of $61,000 or 25% of compensation (though limited at $305,000 in 2022).

Luckily, you can deduct the lesser of your contribution, restricted at the cap of $305,000. Withdrawals are taxed as income in retirement.

If you have employees, you must contribute the same to theirs as you did to yours. So if you did 15% for yourself, you must match and contribute 15% to each eligible employee. (Note: you are counted as an employee, that is why).

Note: There is no Roth SEP IRA.

SIMPLE IRA:

As the top choice for mid to large businesses up to 100 employees, SIMPLE IRAs are easy to setup and the employees own their own accounts. However, contribution limits are less than SEP IRAs and solo 401(k)s. Employees can contribute up to $14,000 (and a catchup amount of $3000 if over 50) in 2022. If as the employer you are contributing, too, the max contribution limit is $20,500.

Although these accounts are not as flexible, contributions are deductible and tax-deferred to withdrawal in retirement. Whatever contributions are made by the business is tax deductible as a business expense. Note: A 401(k) SIMPLE is also an option. However, these are more expensive to setup and require much more oversight

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Retirement Security & Behavioral Finance

Your mind is wired with cognitive biases that influence your decision making—something that does not make planning your retirement as you wish and need easy. Behavioral finance studies the impact cognitive functions, social, and emotional factors have on financial decision making. Understanding this can increase overall financial health and allow for a more secure and successful retirement.

Loss Aversion Understanding

Research shows that folks are more stressed by losing money than gaining it. This is call loss aversion. This can make investment management and retirement planning problematic. In order to achieve a risk-based retirement plan and obtain reducing those Top Ten Risks, having a basic plan is the best first step for a secure retirement. You need to know your options!

Know Yourself

Naturally, folks are risk averse—but even this instinct needs to be well-informed. Understanding your motivations and wants for retirement allows you to set goals. When brainstorming your retirement wants and goals, try different ways of phrasing them. Going with the one that feels more motivating is what you should chose.

Know How Your Money Can Buy You Happiness

Think of your retirement as a trade: time and money. You spend decades dedicated to working and retirement is now your time. While planning for retirement keep that in mind! And financially, think about what will bring you happiness. Traveling? Starting a new business after retirement? Downsizing your home and spending more time with family? Knowing how you wish to focus your money promote you to stay motivated and overcome cognitive biases as you focus.

Decisiveness is Key

Ironically, good decision-making skills comes in handy here. Understanding your cognitive biases and having your goals properly aligned means success will allow you to better make those decisions—even understanding your past decisions will help!

The basics for retirement decision making are comprehensive retirement risk understanding, risk-based testing and planning, and knowing strategic options to reduce the risks.

Be Friends with Your Future

Ever heard of present bias? This is our tendency to value the current moments more than the future ones. For example, you are more likely to spend money on something that will make you happy now than you are to invest or save it for your future self. Present bias is actually a major factor in why folks have a hard time saving and planning for retirement.

Visualize your retirement goals. Keeping in mind your future self not only will help with retirement planning, but it will help your overall well-being!

For more information on behavioral finance and how it will help your retirement and your clients’ retirement, listen to our episode “Turning Knowledge into Action” on the Retirement Risk Show.

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The Importance of Stock Bubble Stages

In context, a financial bubble is observed disbelief when prices increase, and stocks become overvalued. A bubble can pertain to individual stocks, an entire sector, market, or asset class. When the bubble ‘bursts’ stocks or assets are sold off and prices rapidly decline. The burst leads to a crash. While the collateral of the burst depends, it may spill over into other areas. For example, the U.S. dotcom bubble in 2000 and the 2008 real estate bubble bursts lead to severe recessions.

Stages of a Bubble

  1. Displacement begins when investors obsess over new ideas or opportunities such as technology. During these periods prices will steadily, but slowly, rise.
  2. Boom follows as the momentum from the displacement catches. While more people invest in the specific asset, widespread attention is brought upon it. The bigger the audience, the more people decide to invest because they want in on the success. As more investors invest even more follow.
  3. With prices still going up, euphoria reaches extremes that keeps a steep rise on prices. What plays out next is that people are fooled into still buying more.
  4. Fourthly, profit-taking begins when institutional investors take advantage of the warnings sign that the bubble is just before its bursting point. These investors begin selling first and take profit. However, predicting the exact moment of popping is difficult.
  5. Popping the bubble could be a major event or a minor jab at the bubble’s edge. Inducing panic, investors want to liquidate assets immediately at any price. This creates a supply that overcomes demand. Prices drop drastically quickly.

Causes of Bubbles

There are limitless ways bubbles can begin, especially in our global economy. The following are major historical influencers:

  • New products or technologies create demand which increases prices.
  • Supply shortages of an asset/item creating a climb in price.
  • Interest rates hit a low, encouraging borrowers to establish lines of credit or take out loans. This leads to increased spending and investing.
  • An uptake of foreign investors come in due to favorable opportunities.

When the Bubble Bursts

Bubble bursts can be triggers by major or minor events. Ultimately, inevitably, bubble must pop. The aftermath can be short-lived where little loss is experienced.

However, the worst-case scenario is a stock market crash leading to a recession (which could lead to a depression). What matters most is the size of the bubble—meaning small or specialized assets classes or bigger sectors such as real estate or tech. After size what matters most for impact is how much investment money is involved.

Debt-fueled bubbles can lead to long-lasting recessions. Our most recent example of this is the housing bubble pop in 2006-07 that jumpstarted the Great Recession.

How will this impact your retirement assets? Listen to The Retirement Risk Show episode “Cause and Effect: Stock Market Edition” where Dave Hall provides an in-depth analysis of the current market, discusses historic crashes and corrections, and speaks about what a market crash in the foreseeable future would mean for you retirement and how to protect your retirement assets before that crash does happen.

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A Retirement Strategy Offering Both Savings and Income

In economic uncertainty, finding answers that provide both savings and an income during retirement becomes challenging. While you try to recover from a downturn, so are companies. And history speaks for itself: employee retirement programs are usually the first cut. This was seen after the Great Recession when corporations across the U.S. reduced and eliminated 401(k) matches. More recently, with the Covid-19 crisis, some companies have begun reducing retirement programs and other employee benefits to aid in recovering from the crisis.

Since retirement is up to the employee, you want something that will withstand the market fluctuations, lower risk, and provide a promised regular income: annuities. As an insurance product, annuities are either done with a single, lump sum payment or recurring premiums that will grow and provide retirement savings and income stream.

Overview of Annuity Types

Variable annuities often yield higher returns because they are directly tied to the consumer’s investment choices. However, they can be decrease in value when the market experiences a downturn. No guarantee is offered with interest or principal protection with these annuities.

Fixed annuities accrue interest off a fixed interest rate set at the beginning of the contract. These are written in stone for a set number of years, meaning they cannot decrease in value for that time. Thus, these annuities offer some protection guarantee, have low yields, and offer low risk.

Fixed indexed annuities are a middle ground of the other two annuities. Based on the performance of a specific index, they provide guaranteed principal protection. Risk is medium with this annuity and has a capped yield that becomes part of the annuity income stream.

Ways Annuities Lower Risk in Retirement

Lifetime income – After accumulation, income payments can be received as either a lump sum, an installment payment for a set number of years, or lifetime payments depending on the rider. This may come with a fee, but some riders have no fee associated.

Tax-deferred – As long as funds remain in the annuity, your savings will remain protected from the yearly taxation on interest. As a chance to earn interest on interest, principal, and on taxes deferred, you get ahead on retirement assets that is not typically available with other retirement accounts.

Principal protection – Protecting your hard-earned money will help reduce retirement risks you will face. With fixed and fixed indexed annuities, your principal investment is protected with the chance to grow and become a stable income stream for retirement.

Growth – Annuities offer a flexibility for growth that may be capped or have a participation rate. These are linked specifically to market indexes. A variable annuity has the potential for a high growth rate, but fixed or fixed indexed annuities allow for participation but less risk.

For more information on how annuities can reduce and eliminate risk in your retirement, please listen to The Retirement Risk Show episode, “The Crossroads of Longevity and Volatility: How Annuities Help.”

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