But in a business this volatile, nothing’s a certainty. Which is why planning for retirement—a dicey venture for anybody these days—is so important for Hall and many others like him.

We talked to Hall and two other restaurant owners who need a little help ensuring a comfortable financial future. Then we brought in a group of personal finance experts; their job was to create a plan that each owner might follow to boost their retirement portfolios. Here’s what lies ahead.

The Plan

Set up an emergency fund
The Connors should put aside three to six months of expenses in a highly liquid account like a money market or CD, says Boyce Watkins at Syracuse University. Since the couple’s personal expenses are $4,000 a month, they need at least $12,000 on hand. Watkins recommends saving $1,200 a month until they reach their goal. A good rule of thumb is to save 10 percent of your annual income over a year’s time. Of that, Watkins suggests the Connors place half their emergency fund in an interest bearing savings account that could be accessed at any time and the rest in a 6-month CD or money market account. The couple’s gross take home pay, $7,250 a month, is eaten up largely by expenses, which should be shaved, Watkins says.

Invest in a deductible IRA
To enjoy the typical retirement income—generally 75 to 80 percent of what you earn working fulltime—they can expect to live off a yearly income of $65,000, says Chris Borden at Canby. They’d need a portfolio worth $1.5 million for Pat to retire by 60. Borden suggests a deductible IRA (which allows contributions to be deducted before taxes), where the Connors can put away $4,000 a year (they’d pay taxes later, when the money is taken out for retirement). “A deductible IRA gives them flexibility,” Borden says. “It’s low cost, with no administration fees, and they don’t have to put money away for other employees.” Putting away $4,000 a year for 22 years in such an IRA earning 8 percent on average, would mean nearly $500,000. Watkins suggests considering a SEP (Simplified Employee Pension) IRA, where the Connors could deduct up to 25 percent of their income. But they’d have to include their employees and match staff contributions.

Trim expenses
“They claim that they don’t like risk, but it’s very risky to have $7,250 in gross monthly income (and) $4,000 in expenditures,” Watkins says. He recommends trimming at least $500 a month in personal spending. Both Connors would like to retire by 60, but Watkins says it may be more realistic for them to push retirement back by at least two years, or maybe as much as seven.

Pay off investors—and fast
While numbers are taking a dive at the restaurant, there are some positive financial pieces that the Paquettes could take advantage of. For starters, a $50,000 home equity line of credit used to start the restaurant has been paid down to $21,000. 

At the same time, the two have upped that equity line to $100,000. By tapping that line of credit, says Jim McCarthy at Morgan Stanley, the couple could pay off the $98,000 they owe investors, including the head investor, who’s owed $78,000 and paid $30,000 a year as a “consultant.”

As McCarthy sees it, that $30,000 a year is essentially imputed interest of 38 percent on what they owe the investor right now. But it gets worse. The $30,000 remains constant through the life of the loan, no matter how much the Paquettes have paid down.

Get rid of the loan, McCarthy says. They should “do it, and quickly.” Then take the savings they would obtain from replacing their current note and pay off their home equity line of credit as quickly as possible. (That plan
only works, McCarthy adds, if the couple plans to stay in the business for the next decade.)

The Paquettes should also pay only half of their two children’s college costs and let the kids borrow the rest, says Robert Meissnerat AXA Equitable.

Invest in Roth IRAs and mutual funds
In order to save enough to continue operating at 80 percent of their $100,000 annual income during retirement, the couple will need to substantially boost the $200,000 they currently have invested to $1.1 million by the time
they retire.

To do that, Joseph Ervolina, who works with Meissner at AXA, suggests Roth IRAs for both Deb and Ernie. That will allow them to put away $8,000 a year.

But “they have a long way to go,” to reach $1.1 million, Ervolina says. And to meet that goal, they’ll need to combine those IRAs with mutual funds, which don’t require large sums of money upfront. The Paquettes say they’re willing to be moderately aggressive in their investments, which is crucial, say Meissner and Ervolina, if they want to retire at 65.

Pay down the debt
To start Hall and Yamashiro must whittle down the $585,000 debt they’ve accumulated, partly due to a renovation. “It’s created a real financial hardship for Lila and I for the first couple of years,” Hall says. But they’re two years into a seven-year plan to pay down that debt.

Assuming all goes as planned and they meet their repayment timeline, Hall and Yamashiro may begin to reap the rewards of their profits and not have to take cost-saving measures such as forgoing their paychecks in the summer when business dries up as locals leave the area.

Get a defined plan
Nadia Allaudin at Merrill Lynch says Hall might consider one of two options. A SEP IRA would allow him to catch-up quickly on his retirement income given his age, with annual contributions allowed up to 25 percent of his income. Then there’s a defined benefit plan, ideal for small business owners who want to put a lot of money away because it defines through an actuary how much money you plan to put aside for retirement. That would allow Hall to put away as much as he needed a year, since there are virtually no contribution limits on a defined plan.

A defined benefit plan, given Hall’s age and late start at retirement, might be the best option. To reach $1 million by age 65, assuming an 8 percent return on investment, would mean the couple would have to save $34,100 a year, says Geordie Crossan at NBS Financial Services.

If Hall and his wife don’t feel they could comfortably sock that much away, Crossan suggests they stick with the simple IRA and put away as much as they can. While SEPs do require that employers offer the plan to employees, Crossan says it’s likely that staff may want to keep all the cash they make in tips and opt out of the program, making the cost of running it negligible.

Hall’s attitude of being moderately aggressive is a good one at his age, Crossan says. “At age 50 you don’t want to be ultra aggressive or conservative. Moderately aggressive would mean dividing investments into 60 percent equities and 40 percent fixed income and cash.”               

Pat Connors
Owner, Pastiche Modern Eatery
Age: 38
Income: $87,000
Savings to date: $19,000
Retirement goal: $1 million savings by age 60

You know what they say: How do you make a small fortune? You take a big fortune and open a restaurant,” says Pat Connors, owner of Pastiche in Tucson, Arizona. With more than $1 million in debt and an annual income of $87,000, he’s familiar with risk. Connors operates the eight-year-old fine-dining restaurant with his wife, Julie. The two have worked in restaurants since high school.

“We call the restaurant business a drug,” Connors says. “Once you’re hooked it’s hard to get out.”
When they took over their current space, they arranged to inherit the lease. “We designed everything on a cocktail napkin,” Connors says. They borrowed $1 million from friends and family and launched a restaurant plucked from “100 different ideas floating around in our head.”

Because Julie is 10 years older than Pat, who is 38, their future may consist of staggered retirements, with Julie exiting the business first. With a 9-year-old son, they of course must plan for unexpected personal expenses. And that doesn’t even include restaurant emergencies (say, an oven that tanks).

Deb Paquette 
Owner, Zola
Age: 50
Income: $100,000
Savings to date: $200,000 in mutual funds and IRAs
Retirement goal: $1 million by age 65

Deb Paquette jests that tight finances have forced her to remodel her home with cardboard. “I almost have the family room finished,” she says.

While her finances are tight, they’re not quite that dire. Deb has more than 30 years of cooking under her belt, picking up experience as a chef at hotels and restaurants in Florida, New York, Arizona and now Tennessee, where she and husband Ernie launched Restaurant Zola in Nashville three years ago.

“We’re totally people who worry about the future,” Paquette says. And the fact that 2,500 new restaurant seats have opened in the Nashville area in the past five months is causing her to stress about competing for the area’s business. “I think every restaurant owner has a love/hate relationship with their business.” And that, she implies, is largely due to the financial strain of running an independent restaurant.

While Deb is 50 and Ernie 44, they’re in excellent health and think retirement may be at least a decade away. That gives them time to make smart investments and fatten what has been a thinning bottom line for the past two years. Gross profit dropped by more than $91,000 between 2004 and 2005.

Albert Hall
Owner, Acacia at St. Philips
Age: 50
Income: $80,000
Savings to date: None (with holdings in business of $250,000)
Retirement goal: $1.1 million by age 60

Albert Hall started working in restaurants on weekends and summers when he was 13. At 17 he was cooking in the Coast Guard, followed by a culinary apprenticeship and later training at the Culinary Institute of America. Hall and his wife, Lila Yamashiro, now own Acacia at St. Philips in Tucson, Arizona.

Hall, who is 50, is facing down retirement, wondering just how to make the profit he earns at Acacia work as hard as it can.

“Our first year we did $2.1 million in revenue,” he says. “For a 108-seat restaurant, that’s not too shabby.” And revenue continues to climb. In September, the restaurant was up $22,000 for the month, 40 percent higher than they were last year at the same time. All of that is adding up to a $450,000 annual profit, $80,000 of which is going directly into Hall’s and Yamashiro’s pockets in salary.

To retire at 60 (much of his nest egg will come from selling the restaurant) Hall will need to aggressively manage both debt and investments. He might even consider putting off retirement a couple years.

(November 15, 2006)