Re­tired busi­ness own­ers should di­ver­sify as­sets

The Denver Post - - BUSINESS - Pam Du­mon­ceau has 23 years of ex­pe­ri­ence and is the prin­ci­pal of Con­sis­tent Val­ues, a Regis­tered In­vest­ment Ad­vi­sory firm in Green­wood Vil­lage.

Re­tire­ment means some­thing dif­fer­ent to ev­ery­one. This week we look at a cou­ple who en­joyed their first year of re­tire­ment to­gether but are try­ing to fig­ure out where to go from here.

The sit­u­a­tion

Thomas, 58, and Sharon, 57, have been mar­ried 35 years and raised three chil­dren in Au­rora. All three chil­dren have launched suc­cess­fully and two live lo­cally with their fam­i­lies. Sharon stopped work­ing for the fam­ily busi­ness in 2013 and Thomas re­tired in Jan­uary 2015 af­ter run­ning a boat­ing sup­ply busi­ness for 30 years.

Thomas and Sharon are typ­i­cal busi­ness own­ers with more of their as­sets out­side IRAs than in­side IRAs. The cou­ple’s as­sets in­clude three tra­di­tional IRAs to­tal­ing $328,475, two mu­tual fund ac­counts to­tal­ing $649,879, $116,800 in a stock trad­ing ac­count, $38,146 in an op­tions trad­ing ac­count, $241,465 in money mar­kets and $15,900 in cash and sav­ings. The cou­ple’s house is val­ued at $600,000 and they owe $201,000 on the mort­gage.

Thomas has taken the past year to de­com­press. He is con­tem­plat­ing re-en­ter­ing the work­force in some ca­pac­ity for his own men­tal health. The cou­ple gen­er­ated no in­come in 2015 and their tax re­turn showed a neg­a­tive in­come of $13,174.

Thomas has al­ways taken the lead on the fam­ily fi­nances and only in­cludes Sharon in the fi­nal de­ci­sions. He wrote to What’s The Plan to make sure “our money is go­ing to last!” The cou­ple projects they need $86,400 per year to live on in re­tire­ment.

The rec­om­men­da­tions

Thomas and Sharon’s sale of their busi­ness re­sult­ing in about $1 mil­lion out­side of IRAs worked well for them. Thomas does not need to go back to work, but if he wants to keep his mind sharp there are many part-time op­por­tu­ni­ties, in­clud­ing con­sult­ing to com­pa­nies like the one he sold, that may be a per­fect fit.

My big­gest con­cern for Thomas and Sharon is that their as­sets are pre­dom­i­nately — 68 per­cent, in one type of strat­egy — with one com­pany. The cou­ple will need to de­pend on this money for the rest of their lives and di­ver­si­fy­ing these ac­counts will al­low them more pro­tec­tion. I rec­om­mend they re­search the sur­ren­der penal­ties and tax im­pli­ca­tions of di­ver­si­fy­ing these as­sets and forge a long-term plan to di­ver­sify.

The neg­a­tive in­come on the cou­ple’s tax re­turn was a missed op­por­tu­nity. Thomas trades the op­tions ac­count and hasn’t been suc­cess­ful at it. He has carry for­ward tax losses from his past trades. The de­duc­tion for these was wasted. One op­tion is the cou­ple could have con­verted from a tra­di­tional IRA to a Roth IRA ac­count and have this money grow tax free for­ever. At the min­i­mum, the cou­ple could have cre­ated $20,000 of joint in­come with no tax. They may even want to con­sider tak­ing more in­come in these early years of re­tire­ment, up to the 15 per­cent fed­eral tax bracket thresh­old to pre­vent higher tax im­pli­ca­tions later in life with re­quired dis­tri­bu­tions and po­ten­tial tax bracket in­creases. Thomas’s ini­tial re­ac­tion to this con­ver­sa­tion was “Why has my tax ac­coun­tant of 12 years never men­tioned this?”

I rec­om­mend Thomas go on­line and get an up­dated es­ti­ma­tion from Thomas and Sharon drew salaries from the busi­ness, so both will be en­ti­tled to So­cial Se­cu­rity and it will even­tu­ally aug­ment the cou­ple’s in­come that they draw from their as­sets. How­ever, if Thomas de­cides to go back to work, even part time, he should re­frain from claim­ing So­cial Se­cu­rity un­til he com­pletely stops work­ing or reaches age 70 to max­i­mize his ben­e­fit. With their So­cial Se­cu­rity and as­sets, the cou­ple will prob­a­bly have the $86,000 per year af­ter tax they need to be com­fort­able.

Thomas and Sharon have some great op­por­tu­ni­ties ahead and de­ci­sions to en­sure their money lasts. The cou­ple can fo­cus on en­joy­ing their chil­dren and grand­chil­dren. Cheers to 30 years of hard work, it’s time they sail off into the sun­set and en­joy the wind in their sails. They’ve earned it.

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