The time to save for your golden years is not tomorrow, but today.
According to Overdrive research, 87 percent of owner-operators believe their Social Security won’t be enough to retire on. They’re right. The Social Security Administration estimates that its checks total only 39 percent of the typical retiree’s income. The average monthly Social Security check is $1,011. In 2007, thanks to an inaccurately named “cost-of-living” adjustment, that average check increases to $1,044, for an average annual income of $12,528. If you aspire to more than that in retirement, you need something more than Social Security. You need your own retirement savings plan.
“The earlier you start saving, the better your retirement is going to look,” says financial adviser Susan York of Ameriprise Financial in Richardson, Texas. “Tomorrow is too late, and it’s never too soon.”
Overdrive research shows 36 percent of owner-operators have not started saving for retirement. The most common excuse – cited by 76 percent of nonsavers – is that saving is too difficult.
Yet the average income among those who plead such difficulty is $51,171. Their real difficulty isn’t income, “but rather difficulty controlling spending,” says analyst Chris Brady of Commercial Motor Vehicle Consulting in Manhasset, N.Y., who compiles the Overdrive Owner-Operator Behavior Report.
A surprising number of these nonsavers, 17 percent, say they’re investing in their owner-operator business, with plans to sell it and retire on the proceeds.
Financial advisers always frown on such an eggs-in-one-basket approach. “If the trucking business faces financial difficulties, then the owner-operator’s retirement savings can be substantially decreased or even wiped out,” Brady says.
Think of your trucking business as only part of your portfolio, York says – and a high-risk part, at that. “Investing in other areas is prudent, and it’s smart.”
Equally prudent is to keep emergency savings separate from retirement savings. “Always have enough cash in an interest-bearing account to cover three months of committed expenses,” York says – truck payment, mortgage, utilities, groceries, etc.
Once short-term savings are taken care of, owner-operators who get serious about long-term savings can choose among a number of new options. Leased operators, moreover, are increasingly likely to find their fleets willing to help.
Gordon Klemp, publisher of the National Survey of Driver Wages, says many fleets now offer leased owner-operators a matching contribution for retirement savings. Owner-operators at Warren Transport of Waterloo, Iowa, for example, have accumulated $500,000 or more in company-matched nest eggs. “If you consider the interest that amount will earn, that’s a huge increase over time,” Klemp says.
Leased operators who take advantage of these opportunities can greatly accelerate their savings plans, but doing so is up to them, Klemp says, because leased owner-operators aren’t employees and therefore don’t qualify for a company-sponsored 401(k) retirement plan.
At Crete Carrier, owner-operators running at least 90,000 miles a year qualify for an annual Individual Retirement Account contribution that ranges from $500 to $1,500, based on seniority, says Richard Snyder, Crete recruiting director.
Crete has offered this benefit since the 1970s not simply as a reward and a recruiting tool, “but as a statement of the mind set that Crete wants to do business with,” Snyder says. The fleet expects its owner-operators to be business owners who plan for the long haul.
Bill Macy of Pulaski, Va., leased to Crete for 31 years, has taken advantage of that annual IRA contribution since it started. “It mounts up a lot quicker than you would realize, if you put into it on a regular basis,” Macy says.
However tempted you are to withdraw money from your IRA or borrow against your 401(k), don’t do it, Macy says. Instead, keep emergency money in a simple interest-bearing checking or savings account, where it’s easy to reach without a tax penalty.
In one sense, retirement savings should be automatic, a percentage or dollar amount you take out of every check no matter what. Deciding where you put those savings, however, takes some thought.
Most owner-operators know about the traditional IRA, which is a tax-deferred savings account. This means the money put into an IRA, as well as the interest, dividends or capital gains that build over time, is not taxed until it’s taken out. IRA funds can be put into stocks, bonds, mutual funds or other investments.
Obvious tax advantages and years of familiarity have made the traditional IRA by far the most common retirement plan among owner-operators. Variations include the SEP IRA, which generally favors incomes above $50,000, and the SIMPLE IRA, which generally favors incomes below $50,000.
Many owner-operators have taken advantage of the newer Roth IRA, which works in reverse: Money is taxed when you put it in, but never again, no matter how much the account grows.
A potential drawback to all IRAs is that annual contributions are limited, though the limits are higher for savers 50 or older. In 2007, for example, the maximum contribution to a traditional or Roth IRA is $4,000, or $5,000 for those past 49.
Much more is allowed now in 401(k) retirement plans, another form of tax-deferred savings. For years, traditional 401(k)s were limited only to employees, often with an employer match as a savings incentive; many owner-operators have 401(k)s begun while company drivers or in previous careers. Since tax law changed in 2001, however, individuals have been free to set up solo 401(k)s, which boast an annual contribution limit of $44,000.
A new retirement plan option, introduced in January 2006, is a combination of the Roth IRA and the solo 401(k) called, appropriately enough, the Roth 401(k): Money you put into it is taxed in the year you earned it, but never again.
York, who recommends the new Roth 401(k), says that whenever you’re given the choice of paying taxes now or later, now is better, for two reasons. First: Assuming that taxes will go up in the long term is the safest of bets, so paying now locks in the lower rate.
The second: The more taxes you can pay when you’re younger, the better. Mid-life expenses such as young children, a monthly mortgage and that growing business all make great write-offs to lower your tax bill. Too many investors procrastinate on taxes until retirement, when those write-offs are gone. “Bite the bullet, pay taxes today, and give yourself a lot of flexibility for the future,” York says.
Macy saves in every way he can think of, from IRAs and mutual funds to occasional stock purchases. “If you just put it in straight savings, the payoff is not high,” says Macy, who has a business degree from Columbia Union College in Maryland.
If you’re married, it’s vital that you and your spouse agree on your financial goals, Macy says. Otherwise, saving is impossible. “It’s very important to have a good partner, one who’s conscious of expenses and isn’t wasteful,” he says.
Years ago, he and his wife bought stock in a small local bank that, several mergers later, has become BB&T, a national financial powerhouse, and their stock has grown accordingly.
The son of a builder, Macy also buys, fixes up and rents houses and businesses around his hometown. “I’m not some wheeler-dealer,” Macy says. “I’ve just been poking it back a little at a time. You have to, because you’re old before you think about it.”
HOW MUCH IS ENOUGH?
Of owner-operators who have begun saving for retirement, almost two-thirds have no specific dollar amount in mind, according to Overdrive research. Saving without a goal is a lot better than not saving at all, but it’s a bit like steering your rig toward the West Coast without knowing whether the destination is Tacoma or Tijuana.
To get a preliminary idea of your “magic number,” begin by calculating your current annual nonbusiness spending: housing, food, personal vehicles and entertainment. Keep in mind that in retirement, you ideally will spend less on some things (such as mortgages) and more on others (such as travel). Then assume a 4 percent inflation rate every year.
Now do the really scary thing and calculate your life expectancy. Various online calculators, such as one at MSN Money, will ask for your age, sex, height, weight, blood pressure and cholesterol level, as well as your family history and other variables. Don’t be surprised if you’re looking at 20-plus years of retirement. Even if the calculator says you’ll have less, be an optimist and remember that people often beat the odds.
Another way to think of your retirement savings goal is to imagine living off the interest or dividends it accumulates. For example, owner-operator Bill Macy of Pulaski, Va., and his wife have a target retirement income of $60,000 to $80,000 a year. At the current prime rate of 8.25 percent, $60,000 would be the annual interest on savings of about $750,000, while $80,000 would be the annual interest on savings of almost $1 million.
DON’T BE ‘GOVERNED BY GREED AND FEAR’
Think of your stock investments as a loaded trailer: The more evenly distributed the weight, the more stable the ride. When you spread your money among multiple investments, at least one of those investments is almost sure to grow.
When it does, experts say, resist the temptation to move all your money into that growth investment; instead, redistribute the gains, so that your portfolio never becomes top-heavy in one area. Certain mutual funds, such as Fidelity Investments’ Freedom 2040 Fund, constantly do this reallocation.
Most individual investors don’t do this, says Ameriprise Financial adviser Susan York, which is why the average investor earns less than a 3 percent return every year, compared to the stock market’s historical average of 12 percent. “The average investor doesn’t use the simple rules, because he’s governed by greed and fear,” York says.
Think of stocks the way you think of truck tires. If a dealer had a reverse tire sale, doubling its prices, would you be more or less inclined to buy those tires now rather than later? Yet when stock prices double, that expensive stock is the very one that novices want to buy. And when the market has a sudden drop, nervous novices are more likely to dump their stocks at rock-bottom prices, only to see them rebound in a few months.
However any particular stock is performing, remember the cardinal rule of investment: “A diverse portfolio is the best way to go, because nothing is foolproof,” York says. “I know, because my granddad put all of his money into Enron.”
Retirement planning can be complex, but lots of help is available. Basic advice can be found online for free via public agencies, such as the IRS, and many private groups.
Owner-operators who already have accountants or business service providers should enlist them in their retirement planning. Surprisingly, Overdrive research shows that only 57 percent of owner-operators who have such partners have had that conversation.
Those serious about saving also may want to hire a financial adviser to handle their retirement portfolios. Some advisers work on a flat yearly fee; others charge a commission based on investment transactions.
Ask prospective advisers whether they have passed the Series 7 exam administered by the National Association of Securities Dealers. Also ask to see their official bio – a detailed resume that includes information mandated by the U.S. Securities and Exchange Commission, including education and any skirmishes with the SEC.
If you know fellow owner-operators with well-thought-out retirement plans, ask them for advice. By emulating them, you too can put yourself on the road to long-term financial security.
Institute of Certified Financial Planners
Internal Revenue Service
National Association of Personal Financial Advisors