Economist: America’s Retirement System Is Failing Us

Your "golden years" may not be so golden.

The majority of Americans (75 percent) nearing retirement age had less than $30,000 in their retirement accounts in 2010. For the poorest Americans in the 50-to-64-age bracket, the average amount saved for retirement was $16,034.

The lack of nest egg savings could become an acute crisis in the U.S. and should force a reexamination of the nation's retirement system, says Teresa Ghilarducci, a professor of economics at The New School.

In a recent New York Times Op-Ed, Ghilarducci argues that the current retirement savings model has failed middle-class Americans. The "do-it-yourself" pension system — aka 401(k) plans — that replaced traditional pension packages 30 years ago mistakenly assumed that individuals without investment experience could "reap the same results as professional investors and money managers," she writes.

In an interview with The Daily Ticker, she says individuals "were asked to do what they really couldn't do. Not because they're irresponsible, not because they didn't plan well, not because they didn't have enough financial literacy. That system asked humans to do what they just can't do — anticipate the future."

The savings accrued by the majority of middle class seniors will not support their current standard of living, Ghilarducci says. Americans should save at least 8 times their annual income to maintain their living standards (she strongly recommends increasing that number to 20 times if possible). For those earning $100,000 a year at the time of retirement, at least $2 million or more would be needed.

Unfortunately most Americans are ill-equipped for retirement and she estimates that 49 percent of middle-class workers will live on a food budget of less than $5 a day — poverty-like conditions.

Americans can no longer lean on social security checks or late retirements as safety nets Ghilarducci notes. Social Security and other entitlement programs have been under attack in Congress. A growing number of lawmakers from both sides of the isle support reducing or curtailing government spending on these 77-year old institutions as means to lower the national deficit. Workers over the age of 55 have a harder time finding employment than younger workers and when they do find work it's usually a big wage cut or reduced hours. According to the Labor Department, 6.2 percent of Americans over the age of 55 were unemployed in July and 50 percent of that group had been out of work for six months or more.

Saving for retirement has become especially hard for many Americans who are struggling to pay everyday expenses. That's why Ghilarducci wants to reform Americans' approach to retirement. She advocates instituting mandatory retirement accounts for all Americans. These would be professionally managed with a guaranteed rate return and annuity payment. This mandated account would be a supplement — not a replacement — to Social Security and other private retirement accounts.

"People need to save a lot more," she says. "Social security is a base but it's not enough. I'm just advocating that people save more."

Posted on The Daily Ticker, August 6, 2012.  See original article here.  

Is Starting a Franchise From Home for You?

Franchising isn't always the easiest way to start a business. But now there are a growing number of opportunities that you can launch from the comfort of your home.

For many, the holy grail of business ownership is finding a legitimate, low-cost, home-based business opportunity. Well, the search is over (for some of you) — many franchises now offer turnkey, home-based opportunities for franchisees seeking a flexible, low-cost way to start a business. What’s behind this growing trend, and what do you need to know to succeed as a home-based franchisee?

The home-field advantage

First, know that home-based business is big, and getting bigger. According to a recent survey conducted by the Small Business Success Index (produced by Network Solutions and the University of Maryland’s Robert H. Smith School of Business) and analyzed by Emergent Research, there are about 6.6 million home businesses nationwide that generate at least 50 percent of their owners’ household income. In total, these businesses employ more than 13 million people.

As technology makes it easier to work from home, and remote work becomes widely acceptable, the stigma that once clung to home-based businesses has faded. But beyond technology, what’s spurring the current surge in home-based franchising is the economy. “With virtually no financing available for startups during the past few years, people are looking for every possible way to reduce the investment needed to start a new business,” says Jeff Elgin, CEO of FranChoice, a network of franchise referral consultants.

Starting and maintaining a storefront franchise is costly. In contrast, says Joel Libava (The Franchise King), franchise ownership advisor and author of “Become a Franchise Owner,” “Most home-based franchises have a total investment of well under $100,000, which includes the up-front franchisee fee, equipment, inventory and working capital.” Some opportunities cost less than $10,000.

What types of franchises can be run from home? Cleaning franchises Jan-Pro and Jani-King were pioneers in the home-based franchising industry, says Libava, but many other business-to-business services also work well from home.

In fact, your options extend far beyond B2B or even service businesses. “Twenty years ago, there weren’t as many options. But today, there’s a huge range of franchises to choose from,” says Franchisesmarts founder Maria Anton. Anton, who has been tracking the franchise industry for more than 25 years, cites fitness, travel agencies, pet services, sports leagues, photography, dry cleaning delivery, children’s extracurricular activities or tutoring services, and maid services as just a few home-based franchise opportunities.

In the past few years, Elgin has seen more product-based businesses — such as carpet, blinds, shelving and closet installation companies — offer home-based opportunities. “They usually sell products by going to the customer’s home and using a computer to make presentations,” he explains.

Franchise Business Review and the International Franchise Association are good starting points for information about various home-based franchises.

What you need to know

What should you know before investing in a home-based franchise? First, while they may cost less than traditional opportunities, “they’re not dirt cheap,” warns Anton. Although janitorial service franchises can be had for as little as $2,500, Elgin says, other service-based franchises typically range from $25,000 to $60,000.

If significant equipment is involved, the total investment can reach $125,000. (However, most franchisors at this investment level offer equipment financing, keeping your cash outlay manageable.) Elgin cautions that it’s “virtually impossible” to get financing for startup costs, so unless the franchisor provides in-house financing, be prepared to cover the initial investment yourself.

“Don’t think that just because they tend to be in the lower end of the investment spectrum, home-based franchises are less risky,” says Libava. “They’re not. They’re just less money.” As with any franchise investment, you should investigate the opportunity thoroughly before signing a contract or investing money.

While getting in on the ground floor of a new home-based franchise may sound tempting, Elgin strongly discourages it. “The risk of being a pioneer is too high,” he warns. “You’re paying for a track record of success, so be sure the company has one.” Call existing franchisees and thoroughly assess their satisfaction with the franchisor, its support and their results.

Part of what you pay for as a franchisee is brand recognition. “Being part of a national chain gives you more credibility than being, say, Steve’s Cleaning Service,” Anton explains. Since you won’t have a storefront to attract customers, the franchisor’s marketing and advertising support will be critical to your success. Ask what kinds of services they offer.

In addition to assessing the opportunity, take a good look in the mirror. Do you have what it takes to succeed as a home-based franchisee? If you think you’ll spend most of your time at home in your pajamas, think again. “Home is where you do your paperwork, but most business will take place outside of the home,” Libava explains.

Making it work

Once you’ve chosen your home-based franchise, approach it as a serious, full-time business, Anton says. “Part-time opportunities are kind of a myth,” agrees Libava — most home-based franchisees require a full-time commitment.

But while home-based franchising requires hard work, it also has the potential for great rewards. “Some of these low-investment franchises have the highest rates of return in all of franchising,” says Elgin. With proper research and the right attitude, you can be one of many happy, home-based franchisees.

Story by Rieva Lesonsky, Published May 17, 2012, Business on Main.  Read the original story here. 

For information about our unique absentee-owned franchise business model, go to www.dentalsupportplus.com.  

5 IRA Timing Rules That Can Derail Your Retirement

Get familiar with IRA dates, ages — or risk your savings

Owning an IRA is one thing. Knowing the rules about IRAs is entirely different. And not knowing those rules can cost you dearly.

“IRAs are extremely complicated and it’s relatively easy for the average IRA account owner, and their financial adviser for that matter, to make simple, but very costly mistakes,” said Jeffery Levine, an IRA technical consultant with Ed Slott and Company.

IRA account owners need to be aware of all sorts of different dates, ages and “clocks.” When it comes to IRAs, timing is everything. 

“Unfortunately though, the tax code isn’t exactly friendly when it comes to timing issues,” Levine wrote in the current issue of Ed Slott’s IRA Advisor newsletter.

Here’s a look at the five timing issues with which, according to Levine, advisers and IRA account owners seem to have the most problems.

1. The age-55 penalty exception

In general, unless an exception applies, IRA owners must wait until they are 59½ to withdraw IRA funds without penalty (the 10% early distribution penalty). The age 59½ rule is based on the IRA owner’s actual age and not the year in which a client turns 59½, Levine wrote.

One exception is “the age-55 exception.” Participants in workplace retirement plans who separate from service in the year in which they turn 55 or older can take a distribution from their company retirement plan without having to pay the 10% early withdrawal penalty. They must pay income tax on the distribution, but they do not owe the 10% additional tax that the Internal Revenue Code imposes on most withdrawals before age 59½.

For the purpose of this rule, the applicable year is a calendar year in which a person turns 55, and not 365 days. 

Of note, this age-55 exception only applies to company retirement plans and not to IRAs, even if plan funds that would have otherwise met the age-55 exception are rolled over to an IRA, Levine wrote. So if you want to avoid the 10% penalty, take the money before rolling it into an IRA.

Trying to make sense of all this? Don’t bother. In a recent court case, a judge ruled against an IRA account owner who quit his job, rolled the money from his company retirement plan into an IRA, and then took a distribution from the IRA without paying the 10% penalty. The IRA account owner argued that he didn’t owe the 10% penalty; the judge ruled otherwise.

“Why should it matter that the money went from the [worker’s company] plan to an IRA before being withdrawn?” the judge wrote in his decision. 

“The answer is that the Internal Revenue Code says that it matters…Many parts of the tax code are compromises, and all parts reflect the need for lines that can’t be deduced from first principles,” the judge said. “Why can an employee withdraw money from an employer’s plan without the 10% addition at age 55 but not age 54? Why does the 10% additional tax apply to withdrawals at age 59 and 181 days, but not 59 and 183 days? These questions cannot be answered by logical analysis. The [Internal Revenue] Code’s lines are arbitrary.” 

2. The five-year rule for 72(t) payments

According to Levine, 72(t) payments — also known as SEPPs or SOSEPPs for “series of substantially equal periodic payments” — are distributions from an IRA that allow owners under 59½ to access money penalty free. With a 72(t), you take equal distributions from your IRA for five or more years or until you reach 59½.

But the 72(t) schedules can be doubly confusing since there are two separate time frames to keep track of.

“In order to successfully complete a 72(t) payment schedule and avoid back penalties and interest, the schedule must continue for the longer of five years or until the [IRA account owner] reaches 59½,” Levine wrote. 

For this rule, the age 59½ requirement is the IRA account owner’s actual 59½ birthday, he said. The five-year requirement is a full five years from the time the first 72(t) payment is distributed.

3. The five-year rule for Roth IRA conversions

On paper, Roth IRAs are relatively easy. In reality, not so much. Case in point: According to Levine, many advisers and Roth IRA account owners struggle to figure out what is taxable and what might be subject to penalties with distributions from a Roth IRA.

“Given the fact that there are actually two separate Roth IRA five-year rules, it’s not too difficult to understand why,” Levine said.

For instance, one five-year rule applies only to Roth IRA conversions. Under this five-year rule, Levine wrote, penalty-free distributions of Roth conversions may be made at the account owner’s actual attainment of age 59½ or after five full years, whichever is sooner. A separate five-year period is established for each conversion. 

The actual attainment of age 59½ is pretty straightforward. But what makes this rule a little tricky is the five full years requirement. 

For instance, one might think that if a conversion is completed on May 10, 2012, the five full years would be up on May 10, 2017. “But if one thought like that, one would be wrong,” Levine said. 

“The subtle wrinkle that throws many account owners and advisers off is that while the five years must indeed be five full years, you don’t begin counting on the date the conversion is completed. Instead, the starting date for the five years — when the five-year clock begins to tick — is January 1 of the year the funds are deposited in the Roth IRA.” 

As a result, he said, “even though a separate five-year period applies to each Roth conversion, multiple conversions made in the same calendar year have a common clock since they share the same January 1 start date.”

4. Five-year rule for Roth IRA qualified distributions

The beauty of Roth IRAs is this: Qualified distributions are tax- and penalty-free. The key to whether a distribution is qualified or not is this: The distribution must be made five full years after an account owner establishes his first Roth IRA, and either the account owner is age 59½, or disabled, deceased (the account is inherited by a beneficiary), or the distribution is for the first-time purchase of a home. 

Here again, attainment of age 59½ is the account owner’s actual age 59½. “But to be a qualified distribution that’s only half the equation,” Levine wrote. “The account owner must also complete the five-year requirement. Remember, this five-year rule is a different five-year rule than the five-year rule for conversions, although they do share some similar aspects.” 

There are several key differences. “One difference is that the five-year clock for qualified distributions can, in some cases, begin to tick on January 1 of the year before the first dollars are actually contributed to a Roth IRA,” Levine wrote.

How can that be, you might ask. “A contribution to a Roth IRA will start the Roth qualified distribution clock ticking on January 1 of the year the contribution is made for, which is not necessarily the year the contribution is made in,” wrote Levine. That’s because Roth contributions can be made up until April 15 of the year after the calendar year it is being made for, he wrote.

Another important difference between the two rules is that the five-year rule for qualified distributions carries over to all future Roth IRA accounts. “Separate clocks are not needed,” wrote Levine.

5. The timing of non-spouse beneficiary RMDs

In general, a non-spouse beneficiary must begin taking required minimum distributions or RMDs by Dec. 31 of the year following the year of the IRA account owner’s death, said Levine. 

“However, when an IRA owner dies after reaching their required beginning date and has not taken their RMD for the year, the beneficiary or beneficiaries must take what would have been the IRA account owner’s RMD by Dec. 31 of the year of death, not the year following the year of death,” said Levine.

Resources

There are many other IRA timing issues about which you should be concerned. There’s the age 70½ rule for RMDs for IRAs, the age 70½ rule for qualified charitable distributions, and the once-per year IRA rollover rule to name but a few. The key to avoiding penalties is getting a handle on these rules well before making any decisions about your IRA.

When it comes to learning about these IRA timing rules, your resources are, sadly, few and far between. One website, IRAhelp.com, is operated by Slott’s company. That website has a directory of advisers who have received training about IRA distribution rules.

Books include An IRA Owner's Manual by Jim Blankenship and Life & Death Planning for Retirement Benefits 7th Ed. 2011 by Natalie B. Choate.

Of course, there’s always the IRS’s website, which offers IRS Publication 590, among other resources. Read Publication 590. 

After that, our best advice is this: You’d be ill-advised to make any IRA moves without being 100% certain that your timing is perfect. 

Robert Powell is editor of Retirement Weekly, published by MarketWatch. Robert Powell has been a journalist covering personal finance issues for more than 20 years, writing and editing for publications such as The Wall Street Journal, the Financial Times, and Mutual Fund Market News.  Read original article here. 

For information on how to purchase a franchise using funds from a self-directed IRA, go to the website for The IRA Institute here.  

 

 

New Bill Offers Steep Tax Breaks for Veterans to Open a Franchise

Tax rebate would make franchise ownership possible for a larger number of returning veterans

Veterans looking to start their own business may get a big assist from the United States Senate, which is considering a bipartisan bill that would provide tax rebates to veterans who become franchisees.

The American Growth, Recovery, Empowerment and Entrepreneurship Act is cosponsored by Senators Marco Rubio (R-FL) and Chris Coons (D-DE), who introduced the legislation in November. The bill proposes to give veterans a 25 percent tax rebate on the cost of franchise fees, up to $100,000.

“The AGREE Act is a meaningful step to find common ground and create a better environment for job creators to start businesses or expand existing ones,” Rubio said in announcing the legislation.

A report by the International Franchise Association shows that for every $1 million of lending obtained by a franchised business, more than 34 jobs are created. The IFA and other organizations are lobbying Congress to help entrepreneurs create jobs for themselves and others by making it easier to borrow the money they need to start and operate a franchise.

The help would come at the same time that federal agencies are aggressively trying to send more of contracting dollars to veteran-owned small businesses. Executive Order 13360, signed by President George W. Bush, directed all federal agencies to send at least 3 percent of their contracting dollars to businesses owned by service-disabled veterans.

“Now is an excellent time for veterans to use the skills they’ve acquired and open new franchised businesses,” said Jania Bailey, COO of FranNet, a national franchise consulting firm. “These incentives make a franchise purchase much easier for veterans.”

With government contracting adding up to more than $425 billion a year, that means there is $12.5 billion that the government is eager to send to veteran-owned businesses.

The U.S. General Services Administration notes, though, that agencies have fallen far short of the 3 percent goal — largely due to the lack of identified veteran-owned small businesses in the marketplace.

The tax rebate on franchise fees would give service members an ideal way to start businesses that already have a proven business model — many of which are well-suited for government contracting work. 

The AGREE Act also reflects a growing realization in Congress that if the economy is going to regain its strength, something needs to be done to free up money to start franchises and other small businesses. Small businesses have accounted for 65 percent of new jobs over the past 17 years, according to the Small Business Administration.

View original post here. 

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