The Four Legs Of Financial Security

January 18, 2003
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If financial security is a four-legged stool, most contractors teeter on only one or two legs when it comes to retirement. That’s because our industry is sorely lacking in a retirement ethic. There’s not one contractor out of 10 in our industry that has a reasonable plan in place to finance retirement for himself, and certainly not for employees. If you talk about retirement plans with them, you see a puzzled look in their eyes. They either haven’t given it much thought, or the thought they’ve given fills them with dread.

Business owners deserve to spend their twilight years in comfort and without financial worries, but only a small percentage of them will. For many, it’s too late. But for contractors with a few decades to go before retirement age, consider the following advice.

The Four-Legged Stool

Leg One — Social Security: It always amazes me how many people look forward to Social Security checks as their main source of retirement income. They tend to exaggerate in their own minds how much of an income Social Security will provide, and underestimate what it will take to support themselves in retirement.

Social Security is a great program, but by itself is not capable of providing for a comfortable retirement, unless you choose to live in a Third World country. Social Security can make the difference between abject poverty and getting by, or between just getting by and enjoying a few creature comforts. But most people who rely on Social Security alone find themselves living a bare-bones existence.

Social Security can be thought of a just one leg of a four-legged stool. Ever try to sit on a one-legged stool? It can be pretty darned clumsy and uncomfortable.

Leg Two — Savings Account: Some contractors have had the foresight to provide a second leg of the stool in the form of modest savings. These typically are “rainy day” funds that sit in bank accounts, treasury bills, or other conservative financial instruments. At today’s interest rates, you’d earn $1,000 to $2,000 for every $100,000 you have invested in these accounts. Most contractors don’t have even $100,000 saved up, so their savings can be expected to provide only a few hundred dollars in retirement income each year.

Social Security and savings provide two legs of the four-legged stool. Ever try to sit on a two-legged stool? Not much better than trying to balance against a single leg. What’s missing for most contractors are the third and fourth legs of the stool.

Leg Three — Profit Sharing: This leg comes from a profit-sharing program or 401(k)-type account with regular contributions based on company profits. Funding is not assured, and some years may contribute more than others, but over time, this really builds up with the compounding of interest. Coupled with tax deferments until money is withdrawn, this pool of money can become Olympic-sized by the time you use it.

With this program you can be more aggressive in your investments, especially when you are still many years away from retirement. Despite Wall Street’s recent troubles, stocks are still the best bet at earning double-digit returns on your money over a long period of time. Yes, many stock investors wince in pain these days with each monthly broker’s statement.

But most of them made a killing during the 1990s, and are still well ahead of where they would have been had they spent the ’90s sinking the same amount of money into bank savings.

HVACR contractors with a profit-sharing plan are so rare as to be remarkable. Yet, those that offer such plans generally can look forward to a retirement filled with travel, golf, fishing, hunting, or whatever other hobbies they may wish to pursue.

Sitting on a three-legged stool is not so bad, is it? For the most part, it will hold you up. But the fourth leg of the stool is the sturdiest of all. It is also rare to encounter in our industry.

Leg Four — Proceeds From Sale of Business: For some contractors who operate profitably and build a business capable of sustaining itself without the founder, this fourth leg represents a huge chunk of change, even running into seven figures. Not too shabby. Most of us could sit comfortably on that kind of four-legged stool.

Unfortunately, this leg represents fewer than 1 percent of the HVACR companies doing business today. The last construction industry census found about 85,000 heating and plumbing companies doing business in the country. (They only count companies reporting a payroll. That total doesn’t include the one-man shops and partnerships out there, few of which are saleable.)

I don’t know how many of those 85,000 companies get sold every year for a significant amount of money, but I suspect it is far fewer than 850. The real number is probably only a few dozen.

Michael Gerber spoke at the ISH North America Meeting recently in Toronto. Gerber’s “E-myth” books spell out forcefully what is the great fallacy of entrepreneurs — the belief that they are indispensable to their business.

Instead, the greatest task of any small business owner is to make himself dispensable. Only if you can create a business that can run without you will anyone be interested in spending considerable money to buy it. Think about it. Why would anyone want to pay good money for a business so dependent on the owner that it’s likely to fall apart when the owner leaves or loses interest in it?

That fourth leg is made of the sturdiest wood around, but it’s so hard to find.

Blau has been in the heating, cooling, and plumbing service industry for over 40 years and is known as “the father of flat-rate pricing.” Blau can be reached at 414-258-4040 or fjbr@blauplumbing.com.

Publication date: 01/20/2003

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