Work in Progress: A Trust Plan for Artists
Sebastiaan Bremer, 34, has been able to sell enough of his drawings and paintings to rise above the “starving artist” lifestyle, but he’s still concerned about long-term economic security. Like most artists, the New York painter has neither medical insurance nor a pension.
“I know quite a few painters who did very well early in their career, but they are in their 50s now and they are still living from painting to painting,” he said. “As an artist, you are on your own. You have nothing to count on except your own hands.”
Saving for retirement is practically impossible, he added.
“The amount I have to pay for two children and my studio and the rent doesn’t leave a lot,” he said. “I can’t borrow because I don’t have anything that a bank would consider regular income.”
Bremer’s complaint is shared by millions of individuals who are self-employed and have irregular incomes. But Bremer’s ability to save for retirement may change, if a newly formed pension plan solely for artists gets off the ground. The Artist Pension Trust, launched in May by New York-based MutualArt Inc., aims to turn pooled art into an annuity that can be tapped in the artist’s old age.
The concept is simple, said Dan Galai, an economics professor and senior vice president of MutualArt. The company plans to invite 250 artists to participate in the trust. Each would contribute two works a year for the first five years. After that, each would contribute one work a year -- or one every other year -- until a total of 20 artworks per person have been received by the trust.
The trust would hold the works, show them or sell them, depending on market conditions. The aim would be to sell all 5,000 works of art over the 20-year life of the trust. Half of the net proceeds from each sale would go into the account of the artist who contributed the sold work; the other half would go into a pooled account for all the artists.
MutualArt would get a cut too -- 20% of the sales price, which is on par with what many galleries would take.
Although MutualArt’s first trust was opened in New York and is intended primarily for East Coast artists, the company aims to start similar trusts in Los Angeles, London, Berlin, Beijing, Tokyo and other cities.
Industry experts say there is a need for some kind of retirement program for artists but that MutualArt still seems to be a work in progress.
“I’m all for creativity, and I think this is an ingenious idea,” said Karen Ferguson, director of the Pension Rights Center, a pension advocacy group in Washington. “As far as the mechanics go, I can’t quite figure it out.”
Galai acknowledges that many of the details have yet to be finalized -- including where the artwork would be stored and secured and exactly how the money from art sales would be invested.
MutualArt says it has raised $2 million from investors to handle start-up costs and has secured the services of artists, dealers and curators to provide advice, support and art management.
Bremer, who was invited to participate because some MutualArt advisors had reviewed his work, is convinced that the final details will work out, and he is enthusiastic about the idea of sharing the risk of his retirement security.
“It is sharing the wealth,” Bremer said. “It’s a little bit socialistic, and I like that. I’m doing great at the moment, but I see this as being conservative in the long run because you never know what is going to happen in the future.”
For artists who are not invited into such a trust -- or for other self-employed people -- sharing the responsibility of saving for retirement is generally not an option. For those individuals, the answer to retirement savings is straightforward but tough, said Peg Downey, a financial planner from Silver Spring, Md.
“Most people don’t have to do anything too imaginative; they just have to save,” she said.
The difficult part is realizing how much must be saved. She says most self-employed individuals need to set aside 50% of their gross earnings for income taxes, long-term savings and emergency money. Most self- employed workers underestimate their tax obligation, she added, because they don’t account for Social Security and Medicare taxes that add 15% to their tax bills.
Then, too, self-employed individuals also must decide whether to save through a tax-favored retirement plan.
Although most employees benefit from tax-favored retirement plans, such as 401(k)s and IRAs, some self-employed individuals face real risks by locking up their money, Downey said. Why? If the money needs to be withdrawn for an emergency, it gets hit with both income taxes and penalties that can wipe away half the savings.
Downey recommends retirement plans only for self-employed people who have adequate emergency savings and enough current income to make the tax benefits worthwhile. Otherwise, it’s just as wise to save for retirement through a simple index mutual fund, she said.
These funds diversify the saver’s assets, charge minimal fees and generate little taxable income while the accounts are building up.
When the money is withdrawn, it’s taxed at capital gains rates, which are far lower than ordinary income tax rates, which apply to dollars invested in retirement accounts. Most important, in an emergency, the money in an index fund can be tapped without tax penalties, Downey said.
The one caveat: Savers shouldn’t tap the funds to buy a house or car or to go on vacation. They should leave the money untouched unless it’s truly an emergency and the emergency can’t be resolved any other way.
“The problem with having the money accessible is it’s often too much of a temptation, especially when people are not making a lot of money,” Downey said. “They see the money just sitting there, taunting them.”
If savers want economic security in their old age, they need to leave the money alone, she said, adding: “It’s a simple strategy, but it’s tough to execute.”
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Kathy M. Kristof, author of “Investing 101” and “Taming the Tuition Tiger,” welcomes your comments and suggestions but regrets that she cannot respond individually to letters or phone calls. Write to Personal Finance, Business Section, Los Angeles Times, 202 W. 1st St., Los Angeles, CA 90012, or e-mail kathy.kristof@latimes.com. For past columns, visit latimes.com/kristof.
