Retired business owners should diversify assets

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 SSA.gov. 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.