It's Not Too Late: Start Planning For Retirement
It's been more than 45 years since Frank Blau launched his plumbing company, but Frank's experience as a business innovator spans well over half a century, longer than most Plumbing & Mechanical readers have even been on the planet. Over the years, some have doubted the validity of Blau's flat rate pricing and other business practices, yet Blau Plumbing continues to dominate the Milwaukee service area. Frank can boast of customers with decades of service history, some being the children and grandchildren of long-time Blau Plumbing customers.
Because of his track record, when Frank speaks his heart, contractors who want to succeed should listen. Now that he's completed the business cycle of birth to retirement, he has a strong desire to sound the alert for contractors everywhere: Plan now for retirement. This was the topic of a recent conversation over lunch in his favorite Milwaukee eatery.
It's not too late.
I mentioned to Frank that many contractors have been in business for years, barely keeping the bills paid, much less building a retirement portfolio. Some may have less than 10 years before age, health or other circumstances dictate that it's time to hand the caulking irons over to a successor. Do they still have time to do something about retirement? His short answer is that if they start now, they'll have something. If they don't start now, they'll end up with nothing. But where to begin?
The Loyalty Dividend
Like most in his market, Blau's is a union shop, which means he contributes to the union pension fund. To attract and retain the best and brightest professionals, Blau offers the additional benefits of profit sharing and a money purchase pension plan. The cost to the company is not as high as you might expect. By attracting better employees, production and sales efficiency is improved, but even more significantly, employee turnover is reduced. Few PHC contractors can boast 30-year employees, but Blau has several. The cost of a better benefit package is more than balanced by reduced turnover costs.
Pay Me Now Vs. Pay Me Later
Death and taxes are two sure things in life. As Blau Plumbing prospered, its IRS payments grew. When Blau Plumbing began paying into its employee retirement programs, it effectively reduced taxable income, resulting in a lower tax bite. It's sort of like instantly earning 25 percent (or more) on the retirement funds, since that's how much would have gone up to Capitol Hill anyway. For employees, funds contributed to qualified retirement plans are moved from the “Pay Uncle Sam Now” column into the “Pay Myself” column. Taxes are then deferred from peak earning years, to be paid during retirement years when in a lower tax bracket.* In other words, retirement planning makes good economic sense for the company, as well as the employees.
How Much Do I Need?
Besides spoiling grandchildren, Frank and Irene, his lovely bride of 56 years, are deeply involved in preserving the heritage of their community. Frank also maintains his deer lodge and, of course, can regularly be found on the links at his country club. Living on a fixed income isn't so bad when there's enough in the pipeline.
Whether it's shuffleboard at the senior center or being the first plumber to scale Mt. Everest, you can estimate how much you'll need in your retirement account if you have a vision of what you'd like to be doing. At this point, you may begin to feel discouraged if retirement time is drawing near. For example, let's say that you expect to need a modest $50,000 per year for retirement, about 10 years away. If you expect to live 20 years beyond retirement and currently have no savings, then you're suddenly faced with the need to deposit $50,000 per year from now till retirement day.
If you are this far along now, with nothing in the bank, then deciding to deposit $50,000 per year sounds about as likely as winning the lotto. The good news in this scenario is that each year of $50,000 in contributions could result in about two years of $50,000 withdrawals in retirement.*
But maybe you don't want to spend 20 years as a retiree. Colonel Sanders launched his chicken franchise at 65 and never retired, living to age 90. Instead of retiring 10 years from now, you may decide to remain as productive as possible for the next 15 or so years. An extra five years of production (and investment) also means five fewer years to withdraw during retirement. This can make a significant impact in the resources required. Instead of socking away $50,000 per year, you can get by with a much more palatable $24,000 per year worth of annual investment.* This is still not chicken feed, but by waiting an extra five years before retirement, you've halved the annual investment required. The message here is to get started now, no matter how much or how little you can put away.
A Blau Success Story
One of Frank's plumbers (we'll call him Ted) decided to take early retirement at age 56 due to health concerns. At the time, through a combination of company contributions and compound interest, Ted's retirement account was more than $350,000. This is not much of a nest egg, but remember he was retiring at age 56. Today, a dozen years later, Ted's retirement income from Blau continues to make the difference between a comfortable lifestyle vs. surviving on a $15,000 annual Social Security income. Had he stayed on the job another 10 years, he could have retired with as much, or more, income than he had while on the job.
Where Is It Going To Come From?
If you've only become a PM reader in the past three or so years, you may not be aware that this column was formerly Frank's labor of love. Go to the archives at www.pmmag.com (be sure to register first) and search just about any column he ever wrote; you'll find the secret of funding your retirement. As in decades past, Frank continues to preach that costs (including retirement contributions) must be included in your cost of doing business. Your customer pays for it. It's just that simple. Now that Frank's enjoying the well-earned fruit of his efforts, he's even more passionate about getting the word out to his fellow contractors.
The PHC trades continue to be woefully under-valued, and it's our own fault. Give me one good reason why some cubicle dweller in an office tower deserves a retirement plan while the professionals who protect health, safety and comfort don't. Are we part of some low-level caste just because we get a little dirt under our fingernails? One thing is for sure: No matter how much your customers appreciate your skill and hard work, they're not going to invite you to use their motor homes when it comes time to relax, so it is up to you to plan for retirement.
Don't Count On A White Knight
What about selling the business to an investor in shining armor as a way to fund retirement? I asked Frank about relying on this exit strategy and, as usual, his advice was based on experience as well as good business sense. On more than one occasion, he's seen business owners who built up equity in their shops, but when it came time to sell the operation, there wasn't a cash buyer in sight who could afford the appraised value. Your business may be worth a tidy sum, but you're at the mercy of the market. If you can't find a timely buyer, you could be faced with the choice of selling at a discount, or self-financing. If your entire retirement future is hanging on the sale of the business, you could be in for an unpleasant surprise.
* Note: Get professional advice. One point that Frank makes very clear is that he relied heavily on financial and legal professionals when setting up his programs. Knowing all the ins and outs of the laws, rules and options in the financial planning world is a full-time job. But the No. 1 tip any retirement planner will tell you is to start now. You're worth it.