Entrepreneur, Stable Income, $400k Savings, Focused on Retirement Growth

Mike and linda

Mike and Linda are married with 2 young children. Mike, age 38, owns a successful plumbing business and Linda, age 36, works part time as a nurse. Their future obligations include sending two young children to college in about 10 years, steadily paying down a mortgage against their condo, and helping Linda’s parents in retirement, likely beginning in about 10 years. Between social security and his pension they can manage but Mike and Linda would like to help them travel and live a comfortable retirement. Mike and Linda’s combined income has been sufficient to cover expenses and save more than $25K per year.

When we met Mike and Linda their investment portfolio consisted of $100K in a 529 College Savings Account, $50K in cash in a checking account, and $250K in an unmanaged SEP IRA containing a few stocks but mostly cash. They were hurt badly in the financial crisis and viewed the stock market as little more than a gamble. Their plan was to work hard, continue to save, and remain mostly in cash. Mike said he might expand his business someday and he liked the safety of cash.

Our first step was to shed some light on the stock market. We explained that while short term price movement can be extremely erratic, growth over longer periods was very consistent. Prices in the short term move for countless reasons, very few of which are intuitive which is why market timing frustrates so many. Over the long term prices represent the persistent innovation of the country’s most successful business leaders who consistently manage to grow profits, or get replaced by people who can.

By working hard and adding consistently to a savings account each year he could easily build up several million dollars including an eventual sale of his business. That would be plenty to fund a reasonable retirement for them and also help Linda’s parents.

We presented an alternative plan in which we would manage two buckets of assets. The first bucket, initially using $50K from the checking account, would be conservatively managed, earning a return far better than any savings account, with access on relatively short notice. Mike’s SEP IRA would become the growth bucket. From their annual savings we would add $10K to the conservative bucket and put the balance through the SEP IRA (limit up to 25% of salary or $54K in 2017).

Assuming they continued working 25 years the savings account option would likely grow to around $900K. If invested with us and stick to our plan we would expect growth to around $5MM, based on historical market returns. Conservative estimate, using the worst 25 year period since WW2, would still be around $2.5MM, net of fees and expenses.

Mike and Linda were shocked at these estimates, even recognizing the future could be very different. Combined with any proceeds from selling his business, their retirement could take on new meaning.