Everything was on track for Ronnie Baron.
His Prairieville-based industrial-environmental company, Pro Serve, was in the midst of its strongest sales year in its 12-year history, thanks to record prices in the oil and gas industry. He was receiving offers for his company, but he was passing on them.
By July, Baron received an offer that was too good to refuse from a Detroit-based venture capital company that put more than $10 million on the table. He decided it was time to retire.
Negotiations proceeded to the point where the parties agreed on a December closing. Then, Baron says, “Everything massively changed with the economy.”
His buyer asked for delays on finalizing the acquisition, citing problems with raising cash. And when the delays dragged into January, Baron backed away from the deal.
“It was a golden opportunity for me, but I worried about getting ‘Bernie-d’ and ‘IRSed,’” he says. “Timing is everything about this business.”
For people like Baron, who build their retirement with their business, the timing is terrible. Not only does he continue to work, but he acknowledges he’ll also have to work harder to weather the nation’s economic downturn.
For example, Baron—sticking to his business philosophy that “you’re either growing or dying”—recently added a pipeline division and also opened an office in Beaumont, Texas. The changes have allowed the company to grow, and they also could positively affect his retirement—when he ultimately chooses to take it.
“We just turned another page, another chapter,” Baron says. “I’ve worked my whole life. I don’t know what I’d do if I didn’t work.”
Baron is among millions of Americans who are adjusting their retirement plans while also battening down the hatches to survive these challenging economic times.
Business owners, workers and retirees alike are working longer to preserve their standard of living. Faced with sobering losses in retirement funds—some as high as 50%—and fears over scandals similar to that of Bernard Madoff and the Stanford Group, more people are asking how they can keep what they have left in retirement funds.
Bill Potter, the tax director for Postlethwaite & Netterville, says his clients are parking their money in less risky investments such as money markets and certificates of deposit, where the funds are protected by the FDIC. Many of his clients understand their options are to work longer, retire partially as a consultant, contract laborer or at a leaner lifestyle.
So far, none of Potter’s clients—many of them doctors and lawyers—have opted for a lesser lifestyle. Even recently retired clients, worried they could outlive their shrinking retirement funds, are telling him it’s likely they’ll have to go back to work.
The pressing question, however, is for how long?
According to Darrell Delphen of Cornerstone Financial Advisors, the “investment math” on this recession indicates the answer could take investors at least 10 years to recover losses.
Even if an investor who lost 50% in retirement funds could get 7% return in these tough times, Delphen says it would take 11 years to recover. And if the loss were 80%, which he says is plausible with assets such as commodities and stocks expected to continue losing value, it would take 24 years.
“Investment math indicates that you must limit your losses,” he says.
Without the spending power of 76 million baby boomers driving the nation’s economy, investments aren’t going to yield what they have in the past. The next wave of prosperity isn’t anticipated until their children—91 million “echo boomers”—hit peak spending after 2020.
“This will be the worst downturn since the Great Depression, and assets will transfer from the hands of the unprepared to the prepared,” says Delphen, who started reducing risk in his clients’ portfolios in July.
Until economic indicators change, Delphen is advising clients to use the bear-market rallies to reduce risk, build cash, pay off debt, resist buy-and-hold strategies and stay lean.
That’s also the game plan offered by Greg Ellis, a CPA and financial adviser with EA Financial Group who counts Pro Serve’s Baron among his clients.
In conjunction with retirement planning, Ellis says it’s equally important to become more proactive with early tax planning to prevent the premature withdrawal of funds as well as to take advantage of deductions to lower the yearly tax bill.
“This is not a hiccup. This is a tsunami,” Ellis says. “One of the best performing stocks on Wall Street was Family Dollar. What does that say?”
The same client who expected 12% return five years ago would happily take 5% now, he says. Companies that don’t watch expenses and have too much debt could have to lay people off in order to survive.
And many people who thought they’d retire this year could be working another five to 10 years.
“At some point, people like Ronnie want to sell their business and retire, but now he’s managing it like he’s going to own it for a while,” Ellis says. “He runs an efficient company and doesn’t like debt, and that will likely be his saving grace.”
Baron says he’s ready if the economy becomes even more unsettled. He’s watching expenses, poised for belt-tightening and set a critical goal: “We’re going to be here in two years.”
