$1,127,376.04
Do you have dreams of early retirement, the yacht, the Caribbean condo, lying by the pool at your Tuscan Villa, luxury and pleasure, as far as your eye can see?
Now you’ll have the time to enjoy it.
With a your Solo 401k Plan you’ll have a retirement strategy that will give you the time to enjoy yourself. After your strategy, the most important thing you can do is invest regularly and rebalance your investment allocations when appropriate. When you make regular additions to your investments, time and the power of compounding (earnings earned on earnings) give them the potential to make a big difference in fulfilling your long-term retirement dreams.
While most of us recognize some convenient, proven ways to save for our future, few have set retirement goals and developed a plan for achieving them. A recent study revealed that 73% of those preparing for retirement believe they should increase their efforts. Though the future holds many uncertainties, one thing is for sure: You'll need to play an active role in planning for your retirement.
Want to Live Off Your Investments .... and Never Work Again?
Successful investing is not a rush job. It doesn't happen over night. If your goal is to live off your investments someday ... and never have to work again... you have to play safe and play to win at the same time.
Investors want a "guru" to tell them what to invest in... and then want that investment to go to the stars.
Well...it doesn't work that way.
If you do not understand the basic principles that allow you to create and protect your wealth under any and all circumstances, then your well will eventually run dry.
Acquiring Wealth is not about the latest stock pick. It's about a process of generating wealth that continues to grow...year after year.
First steps to take
Think of retirement as a period of time, not a point in time.
Plan accordingly. Even if you are approaching retirement age or have already reached it, keep in mind that you may spend as many years in retirement as you did working. So, you’ll need to continue your investment strategy throughout your retirement.
Take a long-term view.
To project your potential retirement expenses, take a look at your life today, and think about how you expect to live after retirement. While some of your current costs will go down, you’ll need to think about the ones that may increase, such as medical costs.
Consider inflation’s impact.
Over the last 75 years, it averaged 3.1%. Assuming this average continues, you would need almost twice as much income in 20 years if you retired today just to maintain your current standard of living.
Understand your investment options.
There are many types of investments available to you. What’s right for you will depend on your goals, feelings about risk and length of time to invest. Also consider which investments will work best for you when you are ready to begin taking retirement income.
Be tax-smart. Taxes can have a huge impact on how an investment grows.
Consider including all investments which offer tax-deferred growth. This allows any earnings to compound tax deferred, year after year. You don’t pay taxes on the growth until you take withdrawals or until other distributions are made. However, be aware that withdrawals taken before 59 1/2 may also be subject to a 10% federal tax penalty
So what's the next step? The key to a successful strategy is a well thought-out plan.
First Steps---401k Retirement Strategies and Goal
Let’s start with our Solo 401k goal of $1,127,376.04 At a basic level, this amount will provide $54,000 a year for at least 20 years. Add $10,000-$13,000 in Social Security benefits to that number for a total of $64,000-$67,000. Experts suggest that 60-80% of your pre-retirement salary adjusted for inflation is a good estimate - but your income needs may be different. If you put a pencil to paper and actually figure this out you're well ahead of the game.
Second Steps---- 401k Contributions
The next steps involve setting realistic plans to achieve your retirement goals by saving on a regular basis. Remember, the magic combination of time and compound interest means that even small contributions can make a big difference.
With the Retirement Group Solo 401K plan you have, not one but two contributions working for you. Depending upon your organizational structure; Sole Proprietor, Partnership, or Corporation, the math is a little different, but two contributions are definitely better than one.
The 401k Contribution Math
Independent of your organization structure, there are a few math items that you'll need to know;
1. Two components make-up the maximum Solo 401k plan contribution: an employer profit sharing contribution and employee salary deferrals, or employee Roth post tax contributions.
For sole proprietors, the figures needed to calculate your maximum contribution under a solo 401k plan are your net profits from IRS Form 1040, Schedule C and your self-employment (SE) taxes as determined on IRS Form 1040, Schedule SE. Once the net profit and SE tax figures are determined, the maximum Solo 401k plan contribution is determined as follows.
Step 1: Determine Modified Net Profit.
Modified Net Profit = Net Profits - ½ SE Tax
Step 2: Determine Maximum Salary Deferral
Maximum Salary Deferral = Lesser of $16,500 (plus $5,500, if eligible) or Modified Net Profit
Step 3: Determine Maximum Profit Sharing Contribution.
Maximum Profit Sharing Contribution = .20 x (Modified Net Profit / 1.20)
Step 4: Calculate Maximum Solo 401k Contribution
Maximum Solo 401k Contribution = Maximum Salary Deferral + Maximum Profit Sharing Contribution.
Note: The maximum Solo 401k plan contribution cannot exceed 100% of the business owner's Adjusted Net Business Income (ANBI), ANBI = Modified Net Profit - Profit Sharing Contribution.
Example:
Lucy Brown is a sole proprietor under age 50, who believes that she will have approximately $100,000 in net profits from Brown’s Real Estate during 2009. Lucy believes that her self-employment taxes for 2009 will approximate $14,060. Based on this information, Lucy calculates her estimated maximum Solo 401k plan contribution for 2009 as follows:
Step 1: Determine Modified Net Profit
- Modified Net Profit = $100,000 - .5($14,060)
- Modified Net Profit = $100,000 - $7,030
- Modified Net Profit = $92,970
Step 2: Determine Maximum Salary Deferral
- Maximum Salary Deferral Contribution = Lesser of $16,500 or $92,970
- Maximum Salary Deferral Contribution = $16,500
Step 3: Determine Maximum Profit Sharing Contribution
- Maximum Profit Sharing Contribution = .20 x ($92,970 / 1.20)
- Maximum Profit Sharing Contribution = $18,594
Step 4: Calculate Maximum Solo 401k Plan Contribution
Maximum 2009 Solo 401k Plan Contribution = Maximum Salary Deferral + Maximum Profit Sharing Contribution
Lucy’s 2006 Solo 401k Plan Contribution
= $16,500 + $18,594 =$35,094
For partnerships, the figures needed to calculate a maximum contribution under an Solo 401k plan are each individual partner's net profits from IRS Form 1065, Schedule K-1 and each partner's self-employment (SE) taxes as determined on IRS Form 1040, Schedule SE. Once the net profit and SE tax figures are determined, the maximum Solo 401k plan contribution for each partner may be calculated as follows.
Step 1: Determine Modified Net Profit.
Modified Net Profit = Net Profits - ½ SE Tax
Step 2: Determine Maximum Salary Deferral
Maximum Salary Deferral = Lesser of $16,500, (plus $5,500, if eligible) or Modified Net Profit
Step 3: Determine Maximum Profit Sharing Contribution.
Maximum Profit Sharing Contribution = .2 x Modified Net Profit
Step 4: Calculate Maximum Solo 401k Contribution
Maximum Solo 401k Contribution = Maximum Salary Deferral + Maximum Profit Sharing Contribution.
Notes:1.The maximum Solo 401k Plan contribution cannot exceed 100% of the business owner's Adjusted Net Business Income (ANBI). ANBI = Modified Net Profit - Profit Sharing Contribution.
2. Assuming a pro rata allocation formula, each partner in a partnership must generally receive the same level of employer profit sharing contribution when expressed as a percentage of her modified net profit.
Example:
Laura Johnson and Joann Anderson are equal partners in L&J Consulting. Each has a 50% profit interest in the partnership. For 2007, Laura and Joann’s accountant has estimated the partnership will have profits of approximately $300,000. Based on this number and the self-employment taxes for each partner for 2009 of $15,510, the maximum contribution that could be made to the L&J Solo 401k plan on behalf of each partner can be determined as follows.
Note: Because Laura and Joann have equal profit interests in the partnership, their respective "compensation" for Solo 401k plan purposes will be the same.
Step 1: Determine Modified Net Profit
- Modified Net Profit = $150,000 - .5($15,510)
- Modified Net Profit = $150,000 - $7,755
- Modified Net Profit = $142,245
Step 2: Determine Maximum Salary Deferral
- Maximum Salary Deferral = Lesser of $16,500 (plus $5,500, if eligible) or Modified Net Profit
- Maximum Salary Deferral = Lesser of $16,500 or $142,245
- Maximum Salary Deferral = $16,500
Step 3: Determine Maximum Profit Sharing Contribution
- Maximum Profit Sharing Contribution= .20 x Modified Net Profit
- Maximum Profit Sharing Contribution= .20 x $142,245
- Maximum Profit Sharing Contribution = $28,449
Step 4: Calculate Maximum Solo 401k Plan Contribution
- Max. Solo 401k Plan Contribution = Max. Salary Deferral + Max. Profit Sharing Contribution
- Max. Deferral + Profit Sharing Contribution = $16,500 + $28,449 = $43,949
- Max. Solo 401k Plan Contribution = $44,949(capped at lesser of 100% of compensation or $49,000)
Based on estimated profits for the partnership of $300,000 for 2009, both Laura and Joann could receive allocations under the L&J Solo 401k plan of as much as $43,949. If either Laura or Joann were age 50 or older in 2009, they would be eligible for an additional catch-up contribution of $5,500 in the form of a salary deferral contribution, bringing their individual maximum contribution up to as much as $49,449.
The 401k Math — Corporations
For incorporated business owners, Solo 401k plan contributions will generally be based on the business owner's Form W-2 Compensation.
Note:
Owners of Subchapter S corporations must base their contributions on Form W-2 income and may not base Solo 401k plan contributions on pass through profits.
Once the incorporated business owner's wages are determined, the maximum Solo 401k plan contribution may be determined as follows.
Step 1: Determine Maximum Profit Sharing Contribution
Maximum Profit Sharing Contribution = .25 x Total Wages
Step 2: Determine Maximum Salary Deferral
Maximum Salary Deferral = Lesser of $16,500( plus $5,500, if eligible) or Total Compensation
Step 3: Calculate Maximum Solo 401k Plan Contribution
Max. Solo 401k Plan Contribution = Max. Profit Sharing Contribution + Max. Salary Deferral
Note: The maximum Solo 401k plan contribution may not exceed $49,000 (exclusive of any "catch-up" contributions) or 100% of Total Wages.
Example:
Ed Vimter is the sole owner and employee of Vimter Construction, a Subchapter S corporation. Ed intends to draw a salary of $50,000 (Form W-2 wages) from the company during 2009. Based on estimated Social Security wages of $50,000 during 2009, Ed's maximum Solo 401k plan contribution for 2009 would be calculated as follows.
Step 1: Determine Maximum Profit Sharing Contribution
§ Maximum Profit Sharing Contribution = .25 x Total Wages
§ Maximum Profit Sharing Contribution = .25 x $50,000
§ Maximum Profit Sharing Contribution = $12,500
Step 2: Determine Maximum Salary Deferral
§ Maximum Salary Deferral = Lesser of $16,500 (plus $5,500 if eligible) or Total Wages
§ Maximum Salary Deferral = $16,500
Step 3: Calculate Maximum Solo 401k Plan Contribution
§ Max. Solo 401k Plan Contribution = Max. Profit Sharing Contribution + Maximum Salary Deferral
§ Max. Solo 401k Plan Contribution = $12,500 + $16,500
§ Max. Solo 401k Plan Contribution = $29,000
Based on estimated W-2 compensation of $50,000 for 2009, Ed could contribute up to $29,000 to the Vimter Construction Solo 401k plan for 2009. In addition, if Ed were age 50 or older in 2009, he would qualify for a catch up contribution of $5,500 in the form of a salary deferral contribution, thereby bringing his maximum contribution amount up to $33,500.
Note: Because salary deferral contributions may not be made with respect to compensation that has already been paid, Ed must complete a written salary deferral election prior to the time he makes his first deferral from his compensation.
OK. We’ve done the math. What’s next?
Last Step... Your 401k Investments
(The Solo-k Retirement Group does not receive commissions, fees or other payments based on your assets or investment growth.)
Imagine.. having the time to write the “Great American Novel”, having the time to sail the Caribbean; wind jamming from Jamaica, Key West, or Nassau down to Cancun, Cozumel, or even Belize; having the time to play with your grand children, helping them learn and grow, or having the time to work in your garden bringing life and vitality to your plants and flowers.
Asset Allocation is the key to fulfilling those dreams.
Studies have shown that asset allocation is the single most important factor in determining returns from investing.
There is no simple answer to investing. One key question to ask yourself is how much time you want to spend on this stuff. If you love reading about the stock market and adore researching companies, then individual stocks and bonds may be your best choice.
If you like to follow the market, but don't want to spend a lot of time researching, you might prefer mutual funds. With mutual funds you can research the management team and fund performance, select the funds that make up the best balance for you, and let a professional management team do the rest.
Or, if you want to be able to simply deposit a fixed amount monthly and forget about it, a balanced portfolio, using index funds might be your best bet. Whatever you choose, the key to success is good asset allocation.
What is asset allocation anyway?
“Got two quarters to rub together? Put them in separate pockets.”
It's the ultimate protection should things go wrong in one investment class or sector, as is likely to be the case from time to time. Asset allocation is about not putting all your eggs in one basket.
For example, many people loaded up on technology stocks in the late 1990s. When the market corrected in 2000, many of these investors experienced dramatic losses. Again in 2008
Your risk tolerance and goals will determine how much you put into each investment category. If you make careful choices with your asset allocation you'll earn better returns without losing sleep.
While you know the importance of regular investing, your investment mix will play a crucial role in reaching the $1,127,376.04 goal.
Your Solo 401k investment mix
Your financial adviser can help you develop an appropriate combination of asset types — stocks, bonds, real estate, insurance and cash — in your portfolio. As you develop your investment mix, two key elements to consider are your time horizon and risk tolerance.
Time horizon
If you are in the accumulation or saving stage, your investment mix should be determined primarily by when you will need to use the money. In general, the further you are from your goal (e.g., saving for your retirement in 20 years), the more you can afford to be invested in more volatile investments like stocks. The shorter your time horizon, the more conservatively you should be invested.
If you are in the distribution stage, such as retirement, your investment mix should be determined primarily by the need for income from your portfolio.
Investment risk tolerance
All investments carry risk — some more than others. The amount of risk you are comfortable with should also play a role in the makeup of your investment mix. For example, if you are a risk-averse investor, you may prefer more conservative investments in your portfolio, even if that means forgoing the potential for greater returns.
One size does not fit all
It’s important to remember that there is no standard solution that will determine the right investment mix for every individual.
While your time horizon and risk tolerance are important, other factors can also influence how you should be invested, including how much money you have already saved and how much you can afford to invest.
Keeping your Solo 401k asset mix on track
Maintaining an appropriate asset mix is a lifelong series of shifting goals, life changes and fine tuning. When your personal circumstances change, your goals, time horizon and risk tolerance are also likely to change, sometimes significantly.
When your investment mix is no longer in sync with your financial goals, your financial adviser can help you rebalance your portfolio. But, it is always a good habit to evaluate your portfolio with your financial adviser on an annual basis — regardless of whether or not your situation has changed.
