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Retiring in a Volatile Market: Control What You Can

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Retirement during a volatile market is unsettling.

Whether you are on the cusp or have already made the leap, a market downturn’s impact on your savings will be felt now and potentially for years to come. How do you keep your plan on track and your desired lifestyle in place?

If you can’t control income, you’ll need to control expenses. And that means budgeting and taxes. You can deploy tactics and strategies to optimize these factors no matter what stage you are in on your retirement journey.

Set a Realistic Budget – And Stick to It

Lifestyle creep is real.

No matter how carefully you budget, somehow, the numbers on the spreadsheet don’t mean much when confronted with fun, deliciousness, seeing family, a quick weekend trip, or anything else. You get the idea.

A volatile market means that drawing income from investments will likely result in selling into a down market. This not only crystallizes the loss, but you may also have to sell greater amounts to make up for lower prices. This will hamper your recovery, and your assets may not grow as much over time.

Reviewing your budget to ensure you keep your spending at a level that is commensurate with your income is critical.

Plan Proactively to Reduce Taxes

Planning strategically for taxes can help you keep more of your income.

This can compensate for budget shortfalls or help you give long-term capital growth investments the time they need to recover. There are a lot of things you can do to keep yourself in the lowest possible tax bracket.

Maximize Tax-Free Social Security Income

Social security benefits have a tax-free component of at least 15%. Whether you pay taxes on the other 85% depends on your overall income level, but you can increase your tax-free income by maximizing your benefits.

Waiting until age 70 to claim increases your annual benefit by 8% for every year from your full retirement age (FRA). If you are married, it may make sense for the spouse with the highest income level to wait until age 70, while the lower-income spouse claims at early or full retirement.

Deploy an Asset Location Strategy

Asset location refers to the types of accounts where you hold investments. They are tax-deferred such as 401(k)s and IRAs, taxable brokerage accounts, and tax-free Roth accounts.

Using all the accounts together to create a tax strategy that lowers lifetime taxes is the goal. The general principle is to match the asset up to the account’s tax treatment. Stocks receive tax-favorable treatment on qualified dividends and long-term capital gains, so one option is to put them in a taxable account.

If you hold municipal bonds, they also go into a taxable account. Higher yielding corporate bonds would be held in a tax-deferred account, as the lower growth rate compared to equities will help reduce required minimum distributions, which are based on the account value.

Using the Roth IRA account as a flexible source of funds can help keep you in lower tax brackets. In years when taxable income is higher, using funds from the Roth account for living expenses can reduce income taxes and help you avoid the IRMAA Medicare Part B and Part D premium surcharge.

Take Advantage of Lower Asset Values with a Roth Conversion

The drop in value of 401(k) and IRA accounts is painful – but it also means that you can convert those assets to a tax-free Roth account with a lower tax liability.

This can set you up for a more effective asset location strategy and can help you control future income and taxes by eliminating RMDs on the assets that are converted.

The Bottom Line

Retiring in a volatile market adds a layer of complexity to all the choices you need to make.

It means emphasizing controlling your expenses, whether lifestyle or the taxes on the income you draw from retirement accounts.

The critical thing to remember is that you do have options, and you can control several important levers that can help you keep your retirement plans intact.

This work is powered by Advisor I/O under the Terms of Service and may be a derivative of the original. The information contained herein is intended to be used for educational purposes only and is not exhaustive. Diversification and/or any strategy that may be discussed does not guarantee against investment losses but are intended to help manage risk and return. If applicable, historical discussions and/or opinions are not predictive of future events. The content is presented in good faith and has been drawn from sources believed to be reliable. The content is not intended to be legal, tax or financial advice. Please consult a legal, tax or financial professional for information specific to your individual situation.

Women and Money: An Evolved Approach

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Women at all age levels are redefining how they think about their financial journey. This includes career paths, planning for flexibility, taking charge of family finances, or being successful on their terms.

There are some generational differences among Gen Z, Millennial, Gen X, and Boomer women—but not as much as you’d think. And two main differences that set them apart from men hold across generations:

  1. Women are better investors than men1
  2. Women are more likely to approach financial planning as a partnership with a trusted advisor2
  3. Women value a financial advisor that listens to them more than men do3

Women tend to outperform men partly because they are more patient investors and trade less. This results in better performance over time and lowers costs.

As to the second result, the easy reach is to point out the men are reluctant to ask for directions when driving too. But it’s a little more complicated than that, and the reasons why women seek financial advice change as they move through their lifecycle.

How they want to partner with a financial advisor is also different. Women want to be sure that the advisor listens to them and understands and respects their priorities.

Gen Z and Younger Millennials

Younger women (Gen Z and younger Millennials) are generally comfortable and confident about money and financial planning.

They’ve grown up with more salary transparency, the proliferation of money-related apps to help with budgeting and investing, and the optimism of youth. They are interested in financial planning that fits their busy lives. They make good salaries, still have debt, are single or newly partnered, and want to get a good foundation in place.

They gravitate to financial planners that offer the planning they need in a way that they can relate to. This includes cash-flow planning, debt reduction strategies, maximizing employee benefits, and above all – helping them improve their financial literacy.

This generation of women understands the value of starting early on the path to financial independence and wants financial planning advice that can help them build a solid foundation.

Older Millennials and Gen X

Portrait of smiling beautiful millennial businesswoman or CEO looking at camera, happy female boss posing making headshot picture for company photoshoot, confident successful woman at work

As women approach the mid-point of their careers, money becomes more complex.

Careers are in full swing, and growing wealth brings to the fore the costs of making a mistake.

These women may not have worked with a financial advisor before. Whether single or partnered, they realize that all the different pieces of their financial lives need to come together in a comprehensive plan.

For them, it’s about creating the option to stop work, scale back work, start a business of their own, or do more meaningful work that may not be as highly paid – while maintaining a current lifestyle and still save for financial goals in the future.

They realize the value of working with a financial advisor that can help them put together all the pieces of their lives:

  • Equity compensation
  • What to do with an annual bonus
  • Tax planning
  • Saving for education
  • Taking the right amount of investment risk
  • Buying a second home or income property
  • Creating opportunity with their wealth

These women want a trusted partner that explains the “why” to them, and guides them to make choices that are right for them.

As things change, they value being able to make changes to a plan to accommodate new goals or different circumstances.

Older Gen and X-Boomers

These women are driving the decision to work with a financial advisor for themselves and their families. Very often, something has sparked the need to partner with a financial advisor to solve an immediate problem.

  • A change of job
  • A spouse’s health issue
  • Aging parents
  • Imminent retirement
  • Death of a spouse
  • Tax issues

Having a trusted partner to help them sort through the issue calmly in a non-judgmental way is paramount. They want someone to help them fix problems, provide solutions, and ensure that no other avoidable situations are on the horizon.

They may realize that a spouse has always done the financial planning and that it may be time for them to understand the specifics of their wealth. They may want to plan for a retirement that allows them the time they have always wanted with their family.

This group has the most anxiety around money and the least excitement.4 They need to develop trust and have an investment plan that helps them achieve their goals – without taking on too much risk.

The Bottom Line

Women are taking control of their and their families’ wealth at all points on the age spectrum.

They value working with a financial advisor, but they are clear in their need to have someone who listens, prioritizes their goals, is a trusted partner, and truly understands how they want to build and maintain wealth.

1.Fidelity 2021 Women and Investing Study.

2, 3, 4. U.S. Bank. Women and Wealth: Exploring the Gender Gap. 2021.

This work is powered by Advisor I/O under the Terms of Service and may be a derivative of the original.

The information contained herein is intended to be used for educational purposes only and is not exhaustive. Diversification and/or any strategy that may be discussed does not guarantee against investment losses but are intended to help manage risk and return. If applicable, historical discussions and/or opinions are not predictive of future events. The content is presented in good faith and has been drawn from sources believed to be reliable. The content is not intended to be legal, tax or financial advice. Please consult a legal, tax or financial professional for information specific to your individual situation.

Mistakes are Expensive: Financial Planning for Gen X and Gen Y

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Financial planning has evolved beyond investing assets.

The old model limited comprehensive planning to a wealthy few with high levels of manageable assets. For many people, their first engagement with a financial advisor was when they needed to create a retirement income plan.

The new fee-only model allows financial advisors with experience and knowledge to assist across the landscape of financial life. And a new generation with very different goals is taking advantage of all the elements to create plans that work for them.

  • Retire early, create “work optional,” or work part-time
  • Save for kids’ college
  • Enjoy life now – and save for the future
  • Invest in a second home or rental property

This generation has created high income and realizes they do not have to wait another 20 or 30 years to have the lifestyle they truly want.

They understand that financial planning is all about tools, tactics, and strategies that can be deployed in tandem to help them keep more of what they make and actively grow their wealth.

It’s about understanding the options, making the right choices for a highly individual path forward, and solving problems.

Cash Flow Planning is the Foundation

Budgeting is the buzzword – but not-so-secret – it doesn’t work.

It’s about making choices to keep spending in check, with almost a scarcity mindset. It is about current expenses and works best over a short-term time horizon.

Cash flow planning looks at the short-term and the long-term. It is a tool to help you make decisions that will help you achieve future goals.

The process helps you identify future income and expenses and plan for big-ticket items.

The result becomes part of your financial plan and dictates changes across your financial plan. Understanding and detailing your flows keeps your investments tracking. It ensures you are realistic about return opportunities and gets you thinking big picture, including minimizing taxes and protecting your assets.

Saving for Kids’ Education

If you haven’t started one yet – the sooner you get saving, the better.

They grow tax-free so that you can build a nest egg for education spending.

You can fund a 529 plan with up to $16,000 per year and still qualify for the annual gift tax exclusion – but you can also fund five years at once if you’re behind and want to catch up. They aren’t just for college – K-12 qualifies too.

Risk Management

Life insurance is critical to keeping your family’s lifestyle and goals on track.

For most people, a term life policy offers the ability to cost-effectively replace your salary during your prime earning years.

The rule of thumb is the policy should be 5-10 times your annual pre-tax income. It may also be time to think about an umbrella liability policy to protect your assets over and above your existing coverage.

But as your income increase – or the potential for income through equity compensation –  you want to be sure you minimize risk. An umbrella policy can provide the coverage you need, but it’s important to factor in the cost.

Retirement Savings

Maxing out retirement savings is the best way to lower your taxable income and increase your investment pool for the future.

If you have complex compensation that is bonus-based, you need a strategy to do this that takes into account the current volatile markets.

It’s Not a Rainy Day Fund – It’s a Sunny Day Fund

Having an emergency fund of 3-6 months of expenses in an accessible account is a solid place to start.

But once you’ve achieved that, are maxing out your 401(k), and saving for specific goals on the side, what do you do with excess income?

It’s all about your time horizon. While your emergency fund is in cash, your taxable investment is goal-specific, so having an account that you invest for opportunities can make sense. It can allow for growth, possibility, and above all – optionality.

Tax Planning Keeps Your Income in Play

All of the tactics we addressed above have one thing in common: tax planning. The theory behind effective tax planning is two-fold:

  • Reduce taxes this year
  • Reduce lifetime taxes

Tax planning touches every part of your financial life, and it is a series of tactical maneuvers combined with proactive actions. It’s thinking through the impact of every move with a tax lens. Because what you make is ultimately defined by what you keep.

The Bottom Line

Financial planning can help you make the right choices to move towards your goals, but selecting the right partner is important.

This work is powered by Seven Group under the Terms of Service and may be a derivative of the original. More information can be found here.

The information contained herein is intended to be used for educational purposes only and is not exhaustive. Diversification and/or any strategy that may be discussed does not guarantee against investment losses but are intended to help manage risk and return. If applicable, historical discussions and/or opinions are not predictive of future events. The content is presented in good faith and has been drawn from sources believed to be reliable. The content is not intended to be legal, tax or financial advice. Please consult a legal, tax or financial professional for information specific to your individual situation.

Estate Planning for Small Business Owners

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Building a business is all about taking risk. You put your belief in yourself, your money, time, and more on the line to create something that can grow and succeed.

But whether your business will fund your retirement plan, or you hope to create a multi-generational family enterprise, there’s one area of risk you shouldn’t be taking.

If you own a business, you need an estate plan. And not just any plan. It needs to cover your wealth and safeguard your family. It also needs to ensure that the business can carry on or that there is an orderly plan for a sale or wind-down.

You’ll most likely need to consult with a financial advisor, a trust and estates attorney, and a tax accountant to get a comprehensive plan in place.

But here are five things to know about creating an estate plan as a business owner.

1. Start with the Foundational Documents

At a minimum, you’ll need a will, a power of attorney, and a healthcare directive, also called a healthcare power of attorney.

The will specifies the disposition of your assets; a power of attorney appoints someone to manage your finances if you are incapacitated, and the healthcare directive appoints someone to make healthcare decisions for you. These three documents ensure that someone you trust can run your business and make decisions.

Wills are a standard estate planning document, and there are some situations, such as appointing a guardian for minor or special needs children, where they are required.

2. Plan for Tax-Efficiency

The current federal estate tax exemption is $12.06 million. This may be above the valuation of your business, so you may not feel tax planning is necessary. However, the current exemption will “sunset” at the end of 2025 and revert to the 2018 level of $5 million, adjusted for inflation.

Estate planning is meant to be long-term and forward-looking. It’s impossible to predict what future tax laws may be with any accuracy, as they are tied to the political climate at both the state and the federal level.

It’s a good idea to build tax efficiency into your plan at every stage.

That may mean creating multiple trusts, managing a business 401(k) plan or cash balance plan, and planning how heirs will pay taxes on inherited property.

Inheriting a business without the means to pay the taxes due would cause an immediate cash crisis, at a minimum.

3. Plan for a Family Succession

If you intend for your children – or at least one of your children – to inherit the business, it’s best to have an unambiguous succession document in place.

Creating a mechanism for dividing ownership while preserving the decision-making powers of whoever will be the chief executive is critical.

You may also want to have documents that specifically keep the business limited to your children only.

top view photo of people handshaking

4. Create a Buy-Sell Agreement

If you have multiple partners and want to avoid disruption, it’s best to get a buy-sell agreement in place.

A buy-sell agreement grants existing owners the right to buy out the exiting owner’s share of the business using a pre-set valuation formula.

5. Life and Disability Insurance Can Protect Assets and Buy Time

Think about who the insured is. Do you need to protect your family or your business?

The correct answer is both, and you need separate policies for each of those beneficiaries. You’ll need a personal life insurance policy and disability policy with your family as the beneficiary to protect them.

To protect the business, you need life and disability policies on yourself and other key people, with the business named as the beneficiary.

The Bottom Line

There’s a lot more to a successful estate plan, but some of it is included in your day-to-day business planning.

For example, let’s assume the intent is to exit the company through a sale. In that case, you should start the process 5+ years from the transaction and incorporate the valuation and other key provisions in with your estate planning, updating the estate plan as information changes.

If you intend to have a multi-generational business, planning to incorporate family members, provide adequate training opportunities, and hand over the reins should also be an ongoing process.

Sitting down with a team including your financial advisor, attorney, and accountant to build a comprehensive estate plan is something you should do sooner rather than later.

The information contained herein is intended to be used for educational purposes only and is not exhaustive. Diversification and/or any strategy that may be discussed does not guarantee against investment losses but are intended to help manage risk and return. If applicable, historical discussions and/or opinions are not predictive of future events. The content is presented in good faith and has been drawn from sources believed to be reliable. This work is powered by Seven Group under the Terms of Service and may be a derivative of the original. More information can be found here. The content is not intended to be legal, tax or financial advice. Please consult a legal, tax or financial professional for information specific to your individual situation.

Fed Raises Interest Rates: Implications and What We’re Watching

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After reducing rates from 2.5% in 2019 to zero at the onset of the pandemic, the Federal Reserve has hiked rates by 0.25%. What does this mean and what should we be watching?

This was about as surprising as dropping a bowling ball on your foot and realizing it hurts.

While there are still MANY risks in the current market environment, this at least removes one uncertainty for now.

The Fed DID raise rates. They DID raise only a quarter-point. And they DID say they were going to raise more this year. (In fact, they hinted that they would likely have a rate increase at each remaining meeting this year).

What does this mean for the markets?

Frankly, not much.

  • Inflation won’t change with a single quarter-point rate increase.
  • Monetary policy isn’t going to change the global dynamics of the Ukraine war.
  • Global supply chains won’t change due to this.

Granted, the mainstream media will make it sound like this is the most important development in the history of mankind, and will bring on “experts” to discuss it ad nauseum. The markets have initially moved higher on this news, which is a good start.

But given the cross-currents around the globe affecting the markets, this interest rate increase is fairly minor in the list of things influencing prices.

As we’ve said many times, markets are extremely complex. Global politics are also extremely complex.

Combine the two and you have an enormous matrix of potential outcomes.

When that happens, it’s best to simplify.

Here is a chart of the S&P 500 Index with the most simplistic view we can think of.

In this chart we show three basic scenarios:

  1. First Bullish Sign: If the market wants to move above the green line (the recent high from early March), then we would have the first sign that a trend change from down to up may be happening.
  2. Chop Zone: In between the green and red lines, there is very little reason to assume the market will ultimately move higher or lower.
  3. Bearish Continuation: If the market falls below the red line, then it is telling us that the volatility is not over and lower prices will follow.

So while we’re in this chop zone, we should consider the daily moves in the market to be noise.

Granted, when markets move 2% and 3% in a day, those are big moves. But until we see a move above or below the levels on this chart, it’s hard to become overly bullish or bearish.

Why do we mark these particular levels? Why might they be important?

Simple: We find it to be an easy way to determine the trend.

In downtrends, each time the market rallies, it stops at a lower level than where it stopped previously. For example, the all-time high was in early January. When it tried to rally in late January and early February, it stopped at a lower price than it was at the start of the year. The same thing happened in early March.

Each time it tried to rally, it made a “lower high”.

Having “lower highs” is the ultimate characteristic of a downtrend. And the market has definitely been in one since the first of the year.

The market can’t sustain a move higher if it doesn’t stop going down. (Thank you in advance for the Nobel Prize in Economics for that statement.)

On the flip side, if the trend of the market continues to move lower, it will make a new low in price below the red line.

That’s another characteristic of downtrends…lower lows.

We use more complex tools than this in our investment process. But this is one ways for you to think about the current market environment.

What are we Watching?

We’ll talk about this more in the coming weeks, but there are some major developments that we are watching right now.

I. Ukraine

This obviously remains the biggest wildcard and by far the biggest risk for markets.

So far, the market’s low (the red line in the chart earlier) occurred the morning of the invasion.

If we get a cease-fire, expect markets to respond favorably.

However, we need to be on guard for continued volatility and potentially lower prices if tensions escalate.

II. De-Globalization of the Economy

This is something we have been thinking about a LOT lately. We will discuss it in a future report as well.

One of the concerning outcomes of the sanctions imposed against Russia is that we have seen a shift to protectionism across the globe.

The globalization of the world economy that began post-World War II was designed to reduce the likelihood of another global war. The idea was that if countries were economic partners, they would have vested interests in maintaining peace.

So far, it has worked.

But since the sanctions were announced, multiple countries have decided to reduce trade. This has the potential to further reduce global supply of everything from oil to grains to semi-conductors.

Maybe these countries are simply responding to inflation and taking a temporarily cautious stance. If reduced trade is a temporary action, then things may go back to normal if inflation falls over the next few months.

However, if we are at the start of a longer-term cycle of de-globalization, there are many negative outcomes that could occur.

These include stubbornly high inflation, shortages of various goods, increased social unrest across the globe and a higher likelihood of more wars.

III. Stagflation

This is another topic we’ll discuss in a later report, but stagflation is becoming a real possibility now.

Stagflation occurs when inflation is high but the economy is in a recession.

It seems strange to think that it could occur in today’s world, but the possibility of stagflation is real.

IV. Market Recovery

We’re obviously watching risks, but not everything is bad right now.

Corporate earnings, for example, were at a record high last quarter.

The Leading Economic Index (LEI), as shown in the next chart, is also at record highs.

This chart goes back 20 years.

One thing to not is that leading up to the financial crisis of 2008, leading indicators were showing signs of weakness. In fact, this indicator peaked in mid-2006, more than two years before things really unraveled economically in 2008.

Note: The leading economic index is made up of ten components, including hours worked, various manufacturing data, building permits, stock prices, yields and expectation for business conditions.

Further supporting the potential for optimism is that both corporate and personal balance sheets are strong, employment is good, and the housing market is on fire.

It will be important to see data that includes the Ukraine war, and what affect (if any) it has had on this data in the coming weeks and months. We will especially be watching the earnings reports closely that begin in early April.

So while there are many reasons to be pessimistic, there are reasons the market could recover and move higher for the remainder of the year.

Bottom line

Ultimately, the market price is what’s important.

Let’s keep watching these levels on the market to see if it can sustain a move higher, and we’ll adjust your portfolio accordingly.

Invest wisely!

In Celebration of International Women’s Day: A Look at Financial Milestones in Women’s Lives

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International Women’s Day started over 100 years ago as a labor movement in New York City.

Women workers in the needle trades began to demand fair wages and workplace limits and protections. Women did not have the right to vote, so to effect change and call attention to the cause, they organized a march through New York City’s Lower East Side.

From the beginning, women’s day has focused on economic equality across every dimension of life, education, and work.

There is excellent news on increasing women’s participation in traditionally higher-paid, male-dominated professions. The now decades-long focus on encouraging STEM education for girls and women has dramatically increased participation in related vocations.

The U.S. Census Bureau reports that while overall women’s workforce participation is up slightly in the 20 years between 2000 and 2019, certain careers have seen tremendous inflows of women. The number of women becoming veterinarians has doubled. Women are becoming chemists and other scientists, mathematicians, and dentists at impressive growth rates. 

As women enter higher-paid professions at increasing numbers, they lower the gap between male and female salaries. And as women are creating their wealth, they are doing it in ways that reflect their lifelong needs, habits, and goals. These are – and should be – different from men at every life stage.

Here’s our round-up of some things women should consider as they work to create lasting wealth at every stage of their financial journey.

The Early Stage of Your Career

Income has likely increased substantially, but debt is often still significant at this stage. One other danger is “lifestyle inflation” – being careful to live within your means and save for the future is the foundation of wealth. Your goal in this stage is to create financial security as a baseline and then work to build flexibility. You may want to change careers, go back to school, even take time off. Saving and investing can make those choices possible.

  • Lower Debt. Strategies to lower debt quickly include refinancing to a lower interest rate, paying more than the minimum every month, and automating your payments.
  • Create a Cash Flow Plan. This isn’t about budgeting – it’s about lining up your money with your short- and long-term goals. Especially if you have lumpy income from bonuses or variable work hours, you’ll want to map out a strategy to put your money to work. Hint: open separate bank accounts to align with goals.
  • Take Advantage of Employee Benefits. Employee benefits are where it’s at to increase income and reduce taxes. Contribute at least enough to a 401(k) to get the employer match and strive for 15% of salary. Take advantage of healthcare and commuter benefits.
  • Begin Saving. Saving into an emergency fund is critical. Automate the process until you have 3-6 months of saved income.

The Mid-Career Stage

For most women, mid-career is the busiest stage. You’re focused on work, but you’re also likely getting married, having kids, buying a home, etc. Besides being the mainstay of your partner’s and kid’s lives, you need to be the CEO of your career to be sure you get paid what you deserve and that you can have the career flexibility you want.

  • Love and marriage (and finances). Yours, mine, and ours is how you create trust and set a precedent for open, honest conversations about money and goals. Begin the conversation before you get married.
  • Maximize retirement savings as soon as possible. Women have longer retirements. If you’ve left the workforce and your spouse is still working, contribute to a spousal IRA annually to keep retirement saving on track.
  • Put Investing on a Schedule. Open a taxable investment account and set up an automatic contribution schedule. Be thoughtful and understand your risk parameters – but get invested.
  • Proactively Advance your Career. Benchmark your career every year. Don’t wait to get promoted or get a raise. You can hire a consultant, build a relationship with a good recruiter, or use Linkedin effectively.

Retirement Planning

It’s finally here! You’ve built a solid retirement savings account; now you’re ready to enjoy your new life. Setting up income in retirement looks different for women than for men, because of their longer life expectancy. Think through:

  • Social Security Income. Delay claiming social security if possible. This can provide a much larger lifetime benefit.
  • Consider working for a few years. Social security bases your benefits on your 35 highest-earning years, so replacing an early career year with a much more highly paid later year can bump up your payments.
  • Life Insurance. If you’re married, think about a spousal life insurance policy.
  • Long Term Care Insurance. Get a long-term care policy in place.
  • Estate Planning. Update your estate plan and talk through everyone’s wishes for what will happen as you age. Doing it now while you’re healthy and creating a funding source will help ensure a graceful, happy older stage.

The Bottom Line

Women continue to make tremendous progress on all fronts while guiding and leading us towards a more inclusive world. Taking time to take care of your finances at every stage can put you on the path to lasting wealth.

This work is powered by Seven Group under the Terms of Service and may be a derivative of the original. More information can be found here.

The information contained herein is intended to be used for educational purposes only and is not exhaustive. Diversification and/or any strategy that may be discussed does not guarantee against investment losses but are intended to help manage risk and return. If applicable, historical discussions and/or opinions are not predictive of future events. The content is presented in good faith and has been drawn from sources believed to be reliable. The content is not intended to be legal, tax or financial advice. Please consult a legal, tax or financial professional for information specific to your individual situation.

Value Your Business like it’s Your Retirement Plan, Because it is.

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Building a successful business can take decades. While working to grow, it’s common to use all available assets above the salary you pay yourself to fund future expansion. Where does that leave you on the retirement side of things? For most business owners, the retirement plan is some form of exit and monetization of your investment.

As you get close to a transition, valuing the business is paramount. The value comes first, and then the sale, and only then do many business owners think about how the sale proceeds will fund retirement. 

There’s a better way. Start with the amount of money you need to live the retired life you want. That’s your benchmark of the value you want to get for your business. Then work from there to create the value you need.

A Different Valuation Metric: What Do You Need to Retire?

Creating a retirement lifestyle should be about your goals, dreams, and plans for what you want to accomplish in the last several decades of your life. It shouldn’t be about plugging a number into a glorified spreadsheet and then eking a life out of whatever income pops out.

Think of it in three stages:

  1. What’s most important to you in the early stages of retirement? Travel? Family? Starting another business? How much will that cost?
  2. As you age, what do you want your life to look like? Where will you live? How will you spend your time? Do you want to be able to help children and grandchildren? Do you want to devote time to philanthropy? What level of income do you need in these years?
  3. What will your legacy be? How will you fund it?

Once you’ve thought through what your retirement looks like, you can begin to think about the amount of money you’ll need to make that happen.

As you begin transitioning your business to an exit, you’ll want to get a comprehensive, accurate valuation. Bridging gaps between what your business is worth and what you need should be your focus. It should guide your timeline and business investment decisions for several years before getting to a liquidation event.

Increasing Your Value

You’ve likely been focused on the long-term growth of your business and are used to planning and taking steps to keep a consistent upward trajectory in place, even if it’s not profitable right away. Value is a different mindset. You want to position your business to be the most attractive to a buyer, which means focusing on profits and getting everything else in place and ship-shape.

Increasing value breaks down to making improvements across several essential functions:

  1. Improve cash flow – lease instead of buy, reduce expenditures
  2. Increase profitability – improve margins from both cost and revenue
  3. Lower your risk – diversify revenue streams and create recurring revenue streams
  4. Streamline operations – inventory management, payroll control, etc.
  5. Attract and retain high-quality talent – qualified retirement plans, cash balance plans, stock plans
  6. Build or refresh your sales/marketing process
  7. Get your books in perfect shape

If you’re wondering how you’re supposed to do all that while running the business, that’s where it gets interesting. You’re not. The sales process has a very truncated timeline. The value of bringing in outside expertise is correspondingly greater. Even if you could do all those things yourself, you can’t do them all at the same time.

Creating the Team You Need

The best approach to getting ready for a sale is to create a team that can work with you to determine what needs to be done systematically, build a schedule to do it, and identify the right sources. Whether outsourcing or hiring in-house, you’ll need to create a working group of consultants – business, marketing, pension, etc. – along with investment bankers, CPAs for the company and those focused on tax structures, and a legal team that can handle the transaction.

Because your business, both now and in the future, is your source of wealth, it makes sense to work with a financial advisor that specializes in transitioning business owners to liquidity. Decisions should be made with your long-term wealth in mind, whether it is valuation, taxes, sales structure, monetizing assets, or your compensation for ongoing involvement. A fee-only financial advisor doesn’t have a conflict of interest, so they can develop the needed expertise to look across the entire transaction, quarterback your team, and then structure your resulting liquidity to create the retirement you want.

The Bottom Line

Selling a business to fund a retirement should start with the retirement part – that’s the goal. Everything else should be in service to that, and good planning can ensure that takes place. Working with a financial advisor to get your ducks in order can help you navigate the transition.

This work is powered by Seven Group under the Terms of Service and may be a derivative of the original. More information can be found here.

The information contained herein is intended to be used for educational purposes only and is not exhaustive. Diversification and/or any strategy that may be discussed does not guarantee against investment losses but are intended to help manage risk and return. If applicable, historical discussions and/or opinions are not predictive of future events. The content is presented in good faith and has been drawn from sources believed to be reliable. The content is not intended to be legal, tax or financial advice. Please consult a legal, tax or financial professional for information specific to your individual situation.

Thinking Through “Life-Changing” Wealth

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my new life chapter one. planning considerations when selling a business, receiving an inheritance or a successful investment.

Incorporating a large lump sum of money into a financial plan requires thinking through a series of impacts that happen over time.

There are financial, emotional, tax, legacy, employment and a host of other issues to be addressed.

Whether the influx is due to an inheritance, an asset sale, or an IPO, taking some time to adjust before making any decisions is a good idea.

We get into some immediate implications, and then some further down the road.

Take Time to Breathe

Before you address the changes a large sum of money will bring, you may want to process the events that led to the inflow.

The loss of someone you care about, the sale of a business you’ve built, the monetization of the work you’ve put into a career are all emotional events.

The cardinal rule of investing is to remove as much emotion as possible. So taking time to work through the underlying feelings before you think about the ongoing changes to your life is a healthy approach.

Prioritize

By far the most important part of this process is to prioritize your actions.

There are some issues that require your immediate attention:

Following the death of a loved one, for example, there is the ugly “business” of processing and settling the estate. Good planning can help make this transition a smooth one, but there are still steps you must take those first few weeks and months.

Selling a business or having a large inflow of stock options require careful tax analysis, which we discuss below.

With any inflow of wealth, you’ll need to address these immediate deadlines.

However, you shouldn’t feel that you need to develop an investing plan right away. Yes, there may be opportunity costs of not immediately getting funds invested, but it is far more prudent to develop a disciplined investment plan to avoid making costly investment mistakes with large sums of money. And the volatility you may be used to with your portfolio takes on a different meaning when you add a zero or two to the end of the values.

Also, if possible, you should avoid any large amounts of spending right away. Your needs, wants, goals, etc. may change as you get used to your new reality, and you don’t want to do anything that can’t be undone.

By prioritizing what decisions you need to make first, you can more easily process the inflow of wealth to help you avoid costly mistakes.

Understand the Cost of Taxes

The money may be yours – but the government most likely has a claim on some of it.

Having a very clear accounting of how much tax is due and when, and how you are going to pay it, is the first step. The taxes due may come out of the lump sum, or it may be more advantageous to pay the taxes from other sources of funds. You’ll need a plan to understand the right choice for you.

For example:

  • An inheritance may include very low-basis stocks that you do not want to sell. But it could have a step-up in cost basis that may warrant selling them first. Tax laws change over time, and understanding what you need to do to is critical.
  • You may choose to structure the sale of a business in a deferred sales trust, so that you can minimize taxes. You’ll need to set up and implement that structure, and plan for gaining access to the funds over time.
  • Post-IPO, you’ll be subject to taxes on your shares, and you’ll have some timelines you need to be aware of and taxes you’ll need to pay, whether you hold on to the stock or not.

Be sure to identify all tax strategies with a tax professional, because there may be ways to reduce your overall tax bill in the year that the event happens.

For example, if you have charitable inclinations, you might want to consider a gift in the year you received the lump sum. One example is via a Donor Advised Fund. Learn more HERE.

The ideal situation is to discuss potential tax implications prior to a large liquidity event when possible.

Rethink Your Approach to Risk Management – Both Investment Risk and Asset Risk

Adding a large sum to your overall financial picture will change how you think about risk.

You’ll need to assess your liability and protect your overall assets. This may mean an umbrella policy, structuring or titling assets differently, or in the case of an inheritance, it may mean a different insurance strategy.

Your investment goals may also change with time.

If you’ve sold a business and this is your retirement fund, your risk profile will look different than it did when you had a business creating income.

With an inheritance, an IPO, or other lump sum, you may decide to change, cut down, or stop work. This will create different time horizons for investing and different risk tolerances.

It may take time to understand what you want to do and put a plan in place.

Keeping assets as flexible as possible is the key to giving yourself choices as you move forward. You’ll want to minimize risk and avoid locking up funds until you have a clear understanding of your new goals.

Create a New Path Forward

Once you get used to your new situation, many people decide to make big changes.

These could include creating a legacy, actively gifting to help others, or using your funds to provide income for yourself so that you can devote your most valuable resource – your time – to causes you care about.

Or it may mean making a big purchase you’ve always wanted, travel, or just taking time to spend with family.

Most likely it is a combination of these dreams.

In the case of a business owner, you worked hard to get to where you are. You most likely made sacrifices that no one sees or knows about.

It is okay to enjoy your new wealth while still using it to positively impact others in whatever way you choose.

The Bottom Line

Thinking through your options means working carefully to create a financial plan that maximizes your assets, minimizes your taxes and provides for you and your loved ones.

The new plan may be bigger and more complicated, but the basic principles will still apply. You’ll still need to take the time to work with your team to set out what you want, and then put it into action.

We’re always here to talk it through with you.