Creative Financial Strategies – Save Your Income and Live Off Of Your Savings ?!?
Did you read that headline right? Save your income. Live off your savings. This sort of thinking certainly defies conventional wisdom. However, for many professionals and business owners, this financial strategy can grow (not shrink) savings while simultaneously maintaining the same standard of living.
As an example, consider a business owner living on $300,000 per year. Assuming a 40% effective tax rate (state and federal less deductions), the business owner is actually living on $180,000 per year. Now, assume this same business owner has $1.8 million in after tax savings (past income that has already been taxed, inheritance, capital gains from selling assets in the past, etc). Assuming that after tax investment yields essentially match inflation, this business owner could live on $180,000 per year for 10 years. Now, over that same ten year period, assume the owner chooses to save $300,000 annually pre-tax. This could be done through paying premiums to a captive insurance company owned by the owner. Of course, captive insurance companies have some annual operating fees and claims. Even if annual operating fees and claims were $30,000 every year, the owner would still be accumulating $270,000 per year of wealth. Over the same ten year period, making the same assumption that after tax investment yields essentially match inflation, the business owner would now have $2.7 million in savings or an increase in net worth of about $900,000 (versus $1.8 million), simply by applying insightful financial strategies.
Summary
10 Year Period
Same Standard of Living
Accumulated Wealth of $2.7 million versus $1.8 million
The above example could be repeated with a business owner living on $900,000 per year (pre-tax) with $5.4 million in after tax savings. By choosing to live on $540,000 of savings annually, the owner can forego business income and pay premiums of $900,000 annually to a captive insurance company owned by the business owner. Even with operating expenses and claims of $90,000 per year, the reserves inside the captive will grow by $810,000 per year yielding a ten year accumulated wealth total of $8.1 million (using the same assumption that after tax investment yields essentially match inflation for both cases).
Summary
10 Year Period
Same Standard of Living
Accumulated Wealth of $8.1 million versus $5.4 million
CIC Services, LLC is a full service captive insurance management company. We help business owners and professionals own their own insurance companies. A captive is a unique insurance company. It includes its own corporation, insurance license, reserves, policies, policyholders, and claims. It is a formal way for business owners to self-insure risk, and captives are generally formed to insure primarily though not exclusively the risks of one or more businesses owned by the same or related parties. Premiums are paid from the parent company to the captive with pre-tax dollars. The captive can invest its assets mostly as its owners choose (some domiciles have restrictions).
Call us to discuss whether or not a captive insurance company or additional captive insurance company is the right move for your business.