They say that retirement ruins people who don’t know how to keep busy. After spending most of our adult lives working, to suddenly stop doing what we’re so familiar doing feels odd. There were plenty moments of loneliness and doubt the first year after I left Corporate America.
For many years I feared retirement spoiling my parent’s lives as well. Everybody needs to have a sense of purpose, and I couldn’t really tell whether my parents found new purpose in retirement. They no longer had to take care of their adult children, nor were they keeping physically or socially busy as they once were. Perhaps I was simply imprinting my own fears onto them.
I think about my parents often because they live a five-hour flight away. If they hurt themselves, I can’t just drive over in a jiffy to help them out. I wonder what they’re up to all the time, hoping they’re keeping happy and busy. I also look to my parents to see what my future might be like. I often wonder at what age I’ll stop playing tennis because my knees hurt too bad. I wonder when I’ll accidentally fall down a set of stairs and break my collarbone. I’m also beginning to wonder more about my mortality.
To help keep in touch with my parents, I started Financial Samurai in 2009 so that they could check in whenever they wanted to see what I was thinking. Over the years, I realized that not only could this website be a third form of communication, Financial Samurai could also become a business that could be used to help keep my father engaged. Let me explain.
STARTING A BUSINESS
When you own a business, you have to decide how to allocate expenses. I would much rather expend money on a family member than on a stranger. There’s nobody I trust more than my parents and spouse. Surely you feel the same way. Things will still go wrong with family, but family will always be #1.
All retirees inevitability lose some sense of purpose once they no longer have a job. I know because I’ve interacted with thousands of retirees over the past seven years, and I’ve chronicled my own feelings through countless posts since retiring in 2012.
I do not believe people want a handout. Instead, people want to feel useful, whether it’s teaching a child right from wrong, to doing something as simple as maintaining a lovely garden. People want to earn their worth. I believe losing a sense of purpose is the main reason why some studies show that some early retirees tend to die sooner.
So I thought to myself, what better way to stay connected with family and provide them greater purpose in retirement than hire my father as a contractor? Not only could I stay more connected with my faraway parents, I’d also provide him and my mother an additional income stream while reducing my taxable income as well!
DAD THE EDITOR
If I want to get technical, I’m in the business of producing content. Articles are my product that can be infinitely consumed thanks to the internet. Given a high quality product is the most important aspect for growing a business, I should therefore spend as much time and money delivering a quality product if I want to grow.
I’ve always been jealous of journalists who get to leverage huge brand names like The Wall Street Journal, Yahoo, and Forbes to garner a lot of readership. All they’ve got to do is fill the seat, and BAM, they’ll get millions of readers just like that. Meanwhile, here I am trying to build the Financial Samurai brand from the ground up as the marketer, writer, CFO, CEO, designer, and technical support.
I believe in my own skills, and I do believe there is a huge market for consuming financial articles written by a finance veteran as opposed to a journalist or freelance writer with less experience. That said, it’s damn hard work making your vision come true from nothing.
Given the challenge I face to consistently produce good content, I thought why not hire someone who has over 30 years of experience writing extensive documents to foreign dignitaries as an American diplomat, a deep understanding of the government, and 40 years of experience investing in the stock market as the man who first introduced me to investing as a high school freshman? Such a decorated person would surely cost over $100,000 to be my editor!
So after discussing the editor role after eating some Korean BBQ with my father, he decided to come aboard for a good price. Beforehand, my father had been running a small international consulting business as a side hobby. Now I’m his business’s main client.
For the past two years, my father has edited over 60% of my posts on Financial Samurai. He’s also acted as a sounding board for some of my wackier posts to make sure I’m not missing something obvious. Through this process, we’ve stayed in touch, grown closer with extensive discussions on the topics I write about, and discussed touchy subject matters such as inheritance and estate planning.
TAX AND INCOME IMPLICATIONS
Everybody should start their own business because there’s so much more flexibility with your finances when you are the CEO. As an employee, you take it and like what’s given to you. If not, you find a new job.
Let me illustrate from a financial perspective how hiring someone you care about can optimize your finances:
Case study #1: Your mother runs a retail business that is having a rough year. Her business is likely going to lose $30,000 from + $70,000 the year before. Your S-Corp is having a banner year and your marginal federal tax rate is 39.6% as a result ($415,000+ operating profits).
Solution: Hire your mother as a contractor and pay her at least $30,000. You save ~$12,000 in federal income taxes ($30,000 X 39.6%), while your mother gets to earn $30,000 tax free because she has $30,000 in losses. You can fine tune the results by waiting until the last week of the year to pay her, presuming she doesn’t need the money to survive before then.
Case study #2: Your retired father has his own part-time consulting business that brings in $10,000 a year. He also has a $40,000 a year pension after 20 years serving in the army. With a combined income of $50,000, he’s in the 15% marginal federal income tax bracket and has an effective federal income tax rate of about 12% since he is married. Given your business earns $250,000 a year pre-tax, you’re in the 33% marginal federal income tax bracket, and pay an effective tax rate of roughly 26%.
Solution: Pay your dad up to $25,300 (his $50,000 current income + $25,300 from you = $75,300 is the income threshold where the marginal tax rate for married joint filers jumps to 25%), which will reduce the tax payable by $4,554 ($25,300 X (33% tax – 15% tax). You can pay your dad and mom up to around $180,000 until the tax benefits dissipate. It’s up to them to figure out their deductions.
Case study #3: Your sister just got out of a divorce and has been out of the workforce for 13 years as a stay at home mom to her two daughters. Although she’s receiving alimony to live now, the alimony runs out in five years. With no mortgage-free property to live in, your sister needs to figure out a way to make money on her own now so that in five years, she’ll be completely independent.
Worst case, she can get a minimum wage job or hustle through the gig economy. But she wants to see if she can make it as an artist first. She’s got some wins, but they’ve only amounted to about $10,000 after a year, and she needs to make at least $70,000 a year to support her family as a single mother. You fear that your sister won’t be able to make it in five years, but you also don’t want to just give her money since she already has alimony. It takes financial suffering in order to create tremendous financial hustle.
Solution: Hire her as a freelance artist by commissioning several paintings for your office or website. Since she is living comfortably now with her alimony, the goal is not to pay her a lot of money, but to help her go through the motions of working with customers, highlighting her work to potentially other buyers, and get her comfortable with business negotiations. By the time her alimony runs out, she’ll have five good years of experience producing quality work for more customers. This is when you can really start to pay her if needed as her tax bracket will be lower.
Case study #4: Your single mother-in-law just retired from her university administration job that paid her ~$38,000 a year. Her university pension pays $1,800 a month, which is unfortunately not enough to live a comfortable retirement life because she still has a lot of mortgage debt from doing a cash out refinance years ago. She also has $25,000 in revolving credit card debt at 11% thanks to a couple major dental surgeries. She’s never been great with her finances because nobody ever sat down to talk her through everything. At the same time, she is too proud to ask for any financial assistance, and also a little embarrassed to talk her financial problems with you.
Solution: The most important thing to do is sit down with your mother-in-law and tally up her net worth, expenses, and income. Make her financial picture as clear as possible. Instead of giving her money, create a job that she will enjoy doing for you, that will also pay her enough to cover her expense gap. A job can be as simple as cataloguing your baby pictures to be used in a product launch one day. She could help clean and organize your office every week. Or she can simply act as a strategic consultant, which is a catch all. The bottom line is for you to make her feel useful, while helping solve her financial problems. Once again, since she is in the 15% marginal tax bracket and you are in a much higher tax bracket, you end up saving a lot on taxes by hiring her.
Eyeball this latest federal income tax bracket chart to get a good idea of what you’re shooting for.
THE ONLY WAY THIS WILL WORK
The only way this process will work is if you truly love and trust the people you hire. It’s important to remind yourself that it’s much better to pay people you love, than pay people you don’t love, or pay the government more taxes rather. The money paid out must be viewed as all part of the family.
Hiring your loved ones to do valuable work is an honor. It’s sometimes very difficult for our parents to share with their adult children their finances, especially if they have financial problems. A child isn’t supposed to die before their parents, just like how parents aren’t supposed to be worse off than their children.
If you can build deeper relationships with your parents, while giving them a greater sense of purpose in retirement, and provide an extra stream of income, I am absolutely sure they will appreciate it. It makes perfect sense to utilize people with 20+ more years of experience than you to help your business grow. And as a society, we should be doing more to mobilize the wisest generation!
Finally, you must discover how much annual income is enough for you. Once you’ve found the annual income that makes you happy, consider allocating any income above that threshold to helping your parents and loved ones. Family first, and then charities.
I hope this article explains how you can achieve at least a trifecta of goodness by starting a business: 1) better relationships, 2) more income for those you care about, and 3) less taxes. Who knows, you might even be able to create more happiness and longer lives as well!
Start Your Own Business Online
I started Financial Samurai in 2009 and my online income is consistently greater than the income I made as an Executive Director at a major financial firm. Starting an online business is the cheapest and easiest route to take. You can leverage your platform to not only sell your products and great products other people have created, you can also brand yourself to find lucrative consulting gigs as well.
If you enjoy writing, creating, connecting with people online, and your freedom, see how you can set up a WordPress blog in 15 minutes with Bluehost. An online business is the best because it’s cheap to start and maintain, and has a 3 billion person potential demand curve. You never know where the journey will take you! Here’s my step-by-step tutorial guide on how to set up your own site.
Updated for 2017 and beyond.