Unconventional Financial Planning

For most of my career, I’ve been a rule follower in regard to the financial plans I created for my clients. I’m still a rule follower when it comes to regulatory issues, but when it comes to making recommendations for my entrepreneurial clients, I’ve learned to become more creative and to have the confidence to go against what the textbooks might say, if it makes sense for my client.

Textbook financial planning tells us clients should:

  • Max out 401(k)s
  • Fund Roth IRAs
  • Avoid debt
  • Never use retirement funds early
  • Don’t put all of your eggs in one basket
  • Minimize risk

I won’t argue these principles, and many others, are 100% the correct path for most people; these are still the principles I use with most of my clients. But, in the last year I’ve begun to work with more entrepreneurial clients and their plans have required unconventional planning.

I credit my close friend Tyrone Ross Jr. with opening my eyes and instilling in me the confidence to be willing to be unconventional with planning when necessary and right for my clients. I saw the success he has had advising clients in the cryptocurrency space, an area most financial advisors avoid like the plague, and realized I could take a similar approach to entrepreneurs starting their own business, looking to grow their business, or working within a larger organization and looking to reach their dreams in a financially responsible manner.

My Own Unconventional Planning

In 2013 I deviated from my personal plan of starting my own firm; for two years I had saved in order to leave the company I was working for and start my own independent firm. I’d promised my wife we wouldn’t have to change our standard of living while I waited out my non-compete and had diligently saved to reach that goal. But, instead of launching my firm in 2013, I went to work for another advisor and accepted a salary that was 1/5th the amount I had made the year before. Long story short, for the two years while I was at that firm, I supplemented my salary with the savings I had accumulated to start my own firm. When I finally decided to start RLSWM, there wasn’t much left in my transition fund.

What happened next is a financial planning 101 “no-no”. Instead of invading our emergency fund, I took a $10,000 distribution from my Roth IRA. That’s right, a CFP® professional took money out of his diversified retirement portfolio to invest in his start-up firm. I had no doubt I would be successful and without this seed money, RLSWM would have never started—I would not be writing this blog today, I would most likely be stuck working somewhere I regretted being, and my quality of life would be much lower.

That $10,000 “transfer” (it wasn’t a transfer in the eye of the IRS) was the best investment I’ve ever made; sure, it would have done well in the stock market over the last few years, but if I am able to accomplish my goals for RLSWM, the ROI will blow market returns out of the water.

Other Real Life Examples Of Unconventional Planning

Before I share more examples of unconventional financial planning, I cannot stress enough that these ARE NOT RECOMMENDATIONS. A lot of thought, conversations, and number crunching went into these decisions. While these fit the client’s risk tolerance and situation, it may not (and probably will not) fit yours. Consult a financial advisor to determine what is best for your family and your plan!

I thought I’d share a few more examples of unconventional planning recommendations; if you’re an advisor reading this, you might feel a little uncomfortable reading these, but in certain situations, going against the textbook answer is actually the right recommendation.

Borrowing from a 401(k)

Due to accepting a new position out of state, I had a client who needed a down payment for a house in their new city, but they still owned their house in their old town—it was on the market, but had not sold yet. Prior to the GFC, they probably could have done a bridge loan, borrowing from the equity in their current home to put down on the new home, but that creative financing has yet to come back to the market (which is probably a good thing).

We discussed renting to determine where exactly they wanted to live, make sure they were in the right school system, understood traffic to and from work, and all of the other important factors that usually only are understood after spending some time in a new city. In this scenario, renting is what my recommendation would have been, but luck was on their side and they found a great home and for a price that was too good to pass up, which left them scrambling for cash to put down to purchase the house.

Much like my personal situation, not wanting to drain their emergency fund, we decided to roll the husband’s old 401(k) into his new 401(k) in order to take a loan out for the down payment; we were fortunate to expedite the rollover process because a loan from his old 401(k) would not have been permissible since he had separated service, and if we’d taken he loan prior to his resignation, it would have been due or a taxable distribution upon separation—neither did their family any good.

The loans was taken, the house was purchased, life is good, and their financial plan now includes having the 401(k) loan repaid with two years, and they are already ahead of schedule.

Distribution from Roth IRA to “invest” in own startup

I briefly touched on my personal experience using proceeds from my Roth IRA to help launch RLSWM, but I wanted to share a little more about the decision. As I mentioned, my family’s emergency fund was an option, and I could have taken the funds from there and repaid them over time, but I viewed the risk of unexpected events like health, housing repairs, etc. and not having enough in savings a greater than shifting my Roth investment from the stock market to myself.

Conventional planning says the stock market is a “safer” long-term approach toward investing and investing in a small start-up business is a huge risk. And yes, I viewed (and still do) my company as a start-up—not all start-up companies are technology companies. However, I knew roughly how many clients I would have to start my firm, I had an idea of what my first six months of revenue would be, and I believed in myself and my ability to build RLSWM.

The trouble with this though, is many founders have crunched numbers, have an idea of revenue, have a great idea, and confidence in their ability to create a successful company and unfortunately, more business fail than succeed. This is where having a financial plan and working with a financial advisor can help, not just on evaluating the unconventional approaches to a plan, but to also act as an advisor on the viability of a business.

A distribution from a Roth IRA to purchase a car, take a vacation, or go on a shopping spree is a hard “no”. But, a distribution from a Roth IRA to start a carefully planned business—well, that is worth exploring.

Forego retirement savings to build a company

Starting a company can put a strain on future retirement savings, at least for periods of time, Conventional financial planning says to pay yourself first, but sometimes forgoing retirement savings to reinvest in your new company is necessary. Or, forgoing retirement savings because the revenue isn’t quite up to where it needs to be is the only option.

For the first two years of RLSWM, I did very little saving for retirement—just enough to help with taxes. It pained me to not be saving for retirement, but I viewed the growing equity of my firm as a different source of “saving”. So while I was not contributing much to my SEP IRA, I was seeing the value of my company grow as the number of clients I worked with grew.

Assuming an entrepreneur is successful, the business she builds will eventually (and hopefully) be sold, which can help make up for the missed years of savings early on.This strategy isn’t without risk: a lack of diversification, illiquidity, and key-person risk are just a few of the considerations that need to be addressed.

On average, Americans have not saved enough for retirement (or in general), but for an entrepreneur starting a business sacrificing savings early can be replaced once the business is sold.

Not An Excuse To Be Reckless

Looking to unconventional financial planning does not mean you should be reckless with your financial planning. Entrepreneurs still have a need for life insurance, disability insurance, proper estate planning documents, and responsible budgeting; in fact, these areas are arguably more important for an entrepreneur.

Whenever possible, sticking to conventional planning is preferred—there’s a reason the textbooks have included these principles. However, in certain situation, it is necessary, preferred, and responsible to take an unconventional approach.

Just make sure the risks, tradeoffs, and opportunity costs are understood.


Disclaimer: Nothing on this blog should be considered advice, or recommendations. If you have questions pertaining to your individual situation you should consult your financial advisor. For all of the disclaimers, please see my disclaimers page.

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