Accelerating Retirement Savings With Leverage

Three keys to a successful program

Leveraging assets to meet personal financial goals isn’t for every client. But given the right circumstances, this strategy can be very effective. There are three keys to making this program work successfully.

First, it takes the right client. The client needs to have a solid business with a steady stream of income in excess of what the company needs to pay its bills or grow. Other firm assets that are not already pledged as collateral elsewhere are frequently considered as well. In addition to lease or rental income, other types of assets could include inventories, holdbacks at auto dealerships, medical receivables (including Medicare and Medicaid) and pre-need contracts at funeral homes.

At the same time, the client must be comfortable with leverage. Most business owners are accustomed to using debt to cover start-up costs or acquire equipment and workspace that helps their businesses grow. Unlike equipment, which depreciates over time, financial products are appreciating assets that become more valuable as the years go by, making this an even more attractive option.

Second, it takes the right vehicles. The economics must make sense. To get the widest spread between loan interest and investment growth, it’s important to start with a long-term, simple, interest-only loan of 10, 15 or 20 years–whatever the retirement horizon. Over time, products that enjoy compound interest will outpace simple interest products, even when the interest rates are the same or similar.

While the proceeds of this loan can be used to fund almost any retirement vehicle allowed by the U.S. tax code, only a few products actually meet the criteria. For the owner to gain the most, however, the program needs to be selective-it should only benefit the owner, for instance-as well as offer low costs and tax efficiency. Purchasing universal life policies and annuities offers a combination of low costs, tax efficiency, stability and principal protection. The last item–principal protection–is important to eliminate the risk of principal loss in a down economy. Clients benefit from the highest possible degree of security and potential for higher returns.

Tapping an established leader

Finally, it takes the right partner. Look for a partner that is an established leader in this space or has established relationships with banks to provide the financing; relationships with legal and tax services to ensure each transaction provides maximum value to the client; and relationships with highly rated carriers to provide the carefully selected insurance and annuity products. It’s also important to work with a partner that has the experience to pull the deal together quickly and can make this investment successful.

Using leverage to fund a retirement plan is a frequently overlooked solution to the common problem of starting too late on retirement planning. In fact, it really can be a smart solution to shifting dormant, non-productive assets into a more useful position for the benefit of the business owner. This approach keeps risk in check while still offering the same kind of returns a conservative client would expect to receive.

Alan M. Harrington, JD, is the president of Global Financial Distributors, Duluth, Ga. You can e-mail him at [email protected].