You need an asset-building mentality in order to acquire the wealth you need to retire.

Last month's focus was on the need to build your retirement program. If you don't have a program in place, the time to begin is now. Setting up a retirement program involves proper planning and several decisions, but more importantly, you need an asset-building mentality. First, let's look at some of the retirement plans that are available. I've turned to my favorite certified public accountant, Mike Bohinc of Keeping Score Inc., to fill us in on the more common plans.

  • Individual Retirement Accounts (IRAs) and Roth IRAs - Both are personal retirement savings accounts available to anyone who receives taxable compensation during the year. Both spouses can have and contribute to these IRAs as long as at least one spouse is working. IRA contributions reduce your taxable income when you make the contribution and taxes are paid upon withdrawal. The Roth IRA doesn't allow a tax deduction at the time of contribution but it provides a tax-free payout at retirement.

  • Simplified Employee Pensions (SEP-IRA) - This is a traditional IRA set up by an employer for the employer's employees.

  • 401(k) Plan - This plan allows an employee to save with pre-tax dollars by contributing to the plan. Employer contributions can make the plan even more lucrative, thus adding a pay off for employee loyalty. The contributions (and any earnings on those contributions) are not taxed until withdrawn from the plan.

  • Profit-Sharing Plan - This is a type of defined-contribution plan. Annually, employers determine whether or not they will set aside a portion of the annual profits into a retirement pool. The amount is divided among the employees, typically based on their annual wages/salaries. Also, the company can decide not to contribute to the retirement pool in a year that the company is profitable.

  • Money Purchase Pension Plan (MPPP) - This is also a type of defined-contribution plan. The employer is required to make annual contributions to each employee's account whether or not the company is profitable.

    For more information about these plans and to explore which ones will work for you, contact your CPA or financial adviser. You can also contact Mike at

    Beyond Retirement Plans

    The retirement programs listed above use the time value of money (compounding of interest), as well as tax benefits to build their value. There's another way to build retirement wealth that starts between your ears: building your net worth. The key to increasing your net worth is to think in terms of growing your assets rather than just making a living. To an accountant, assets and liabilities are simply columns that offset each other. To the wealth builder, liabilities devour assets.

    To illustrate the wealth builder mentality, here's a personal adventure of mine.

    Vincent, a good friend of mine (and like most of my friends, he's smarter than I am), was building a house and wanted to trade his boat for part of the plumbing work. I figured the boat was worth about $1,500 and I had priced the plumbing work at about $1,000. At the time, I was a one-man band and unaware of my true cost of overhead, so I figured I was making $500 in extra profit while trading a few hours of “free” labor for the boat. As I slaved away on the project, I envisioned myself skiing, fishing and running around the lake in my practically free boat.

    By the time I added up the costs - a tune up, a fuel tank, licenses for the boat and trailer, safety gear, skis, life jackets and lights - my “free” boat cost more than I would have charged for the plumbing work in the first place. All told, my free boat had worked out to about $150 per hour of operation at the time I finally got rid of it.

    That boat is long gone. It was nothing but a liability. The plumbing work I traded for it is part of a home that is now worth at least 10 times what Vincent originally invested. He traded off a liability to gain an asset. I wasn't so smart.

    Here's a simplistic, nonaccountant definition of an asset: An asset is anything that will improve your net worth by more than it costs. My almost-free “hole in the water” was a liability since there was no way I could sell it for anywhere close to the value of the time and expense I had poured into it. Before buying any item, ask yourself how it will produce income. If it doesn't produce income, then ask yourself if having it is worth reducing your retirement income.

    Keep in mind that buying the item is only part of the equation. Insurance, licensing, maintenance and operating costs all devour even more cash. You might actually decide that a purchase is worth the price you'll pay but the important thing is to have this asset/liability discussion with yourself each time you decide to spend money. You may be amazed at how much luster that impulse purchase loses once you give it a day or two of wise consideration.

    But what if we're not talking about a leisure purchase. What if you're considering a piece of equipment, a software package, or an advertising campaign? These items may enhance your revenues but won't have enough cash value to balance out their cost if you were to sell them later. The item itself is an expense, not an asset, but if it helps you preserve or improve other assets, it can be a worthwhile expenditure. As with any decision, run the numbers with a critical eye to see if the expenditure will make more money than it costs. Remember: The expenditure needs to earn a profit if it's going to help you build your assets.

    A Little Wealth-Building Psychology

    My boating fiasco highlights an important aspect of wealth building: Accumulation of assets is not a domain for emotions. My idyllic visions of wake jumping and bass fishing kept me from considering the true cost of the deal I was making. I would have spent less money, and wasted far less time, by renting a rig for $300 per day any time I had the urge to go afloat. But there's another, more sinister layer to the decision to burn up assets in order to play with a liability.

    It's not easy to shell out $300 for a day on the lake. Would it be fun? Sure, but at the end of the day, $300 in cold hard cash would have left my pocket and all I'd have would be a few pictures and some receipts. On the other hand, if I had “invested” all that money into my very own runabout, wouldn't I have something tangible for my money? Yes, but being tangible doesn't make it an asset. Ownership still costs money and it probably costs more to own than to rent.

    It's easy to have the same conflict when considering whether or not to purchase equipment. Does it make sense to rent a backhoe when financing makes it so easy to buy one instead? Indeed, there may be a good, sound case for buying vs. renting, but don't let that real life chunk of iron delude you into thinking it's an asset. Instead, let the numbers tell you whether or not it's going to earn its keep.

    The bottom line is simply this: The profit that the equipment produces is what you seek, not the equipment itself. Let the math determine the best choice, not the glamour of that shining hunk of metal rusting away on your lot, causing your property taxes to climb. Keep in mind, the nearer you get to retirement time, the more liquid you want to be. When it's time to sell, that 10-year-old tractor may not be worth all the taxes, interest, maintenance and grief you had to pour into it. If that's the case, then wouldn't renting or hiring a subcontractor make more sense?

    Even stocks, bonds, real estate and savings accounts can be liabilities if they don't cover costs and beat inflation, so don't let the ownership of these instruments lull you into thinking that they're assets. As with the rest of your business, know your costs and sell for a profit. Build wealth as if your retirement depends upon it. It does.