Author: Derek Brown
President Brown & Associates Wealth Management
You have worked hard for many years to build your business to a point to one day have the financial freedom to work less or not at all. Now, you are considering selling your business in hopes of obtaining that financial freedom. This new phase of your financial plan, called retirement distribution & wealth preservation planning, is often a significant mindset shift for people since the goal for most has changed from accumulation to distribution & preservation. The reality is that if you include the often-substantial haircut of taxes due upon the sale of your business and then sequence of return risk during income distribution, it is not uncommon for client’s wealth to last more than 10 years. We need to properly plan to maximize the longevity of your money.
The timing of catastrophic financial planning mistakes is similar to rock climbing in a way. When do most of the accidents happen when rock climbing? Over 80% of rock-climbing blunders come from when the climber is scaling down the mountain! Similarly, over 80% of financial mistakes happen during the income distribution & preservation phase (coming down), not during accumulation. We are all aware of the stories of people retiring with a healthy amount of assets then they involuntarily are required to go back to work in their later retirement years. How does this happen?
4 common catastrophic mistakes:
- They lost a substantial portion of their business sale proceeds to taxes. Although tax avoidance is not possible, tax-deferral is conceivable with the right type of planning.
- Their wealth management team doesn’t have a two-way communicating relationship with their CPA team. With the right partnership, your wealth management team can employ tax planning plays within your investments such as tax diversification, tax bracket manipulation, asset location, and tax-loss harvesting to compliment the work of your CPA.
- They didn’t have an accurate retirement income target. Imagine you are at a shooting range to test your accuracy, but you don’t have a target. You just start shooting. How are you supposed to gauge your results? What is even the point?
- They sell during down markets. A robust retirement income engine is required during the income distribution & preservation phase to help protect you against down markets, tax, and longevity risk.
5 steps to success:
- Recognize that your situation is unique and may require a financial team who has specialized expertise in business exit and retirement distribution & preservation planning.
- Push your wealth advisor and CPA to a teamwork type of relationship to maximize your tax planning.
- Meet with your wealth advisor to determine retirement income based off your legacy goals, vision, and philosophies. Then, identify how much you need your business to sell for in order for you to reach your retirement income goal.
- If appropriate and recommended by your CPA, defer taxes when you exit your business to increase the longevity of your money.
- Once you exit, create an investment strategy as such:
- Determine the rate of return needs on your portfolio and your stomach strength for market volatility that historically has been able to provide your retirement income needs.
- Once you know your rate of return needs, determine a suitable asset allocation strategy.
- Make the investment strategy tax sensitive by employing asset location and tax-loss harvesting.
- Implement a retirement income engine that has strategy around down-market protection, taxes, and longevity risk.
- Do not let short term market swings make you emotional. Stick to the plan whether the market is up or down. If your goals don’t change, typically your assets allocation shouldn’t change.
Author:
Derek Brown RICP, AEP, CFP, ChFC
President Brown & Associates Wealth Management
Phone: 612-758-7724
Email:derek.brown@nm.com
Website:http://brown-associates.nm.com/
ABOUT SUNBELT® – Sunbelt® is Minnesota’s largest seller of companies. Founded in 1978, Sunbelt now has 200 offices worldwide, helping people buy and sell businesses. The Sunbelt Business Advisors Minneapolis office is the largest office in the Sunbelt network with a staff of over 50 advisors, associates, analysts, and business development representatives. The firm provides services to business owners interested in selling their businesses, assistance with merger and acquisition activities, complimentary business value assessments, and advisement for business owners in understanding how to maximize their net proceeds when they exit. The firm provides business brokerage and Mergers & Acquisitions advisory services for companies with revenues from $500,000 to $100 million, as well as finance, exit planning, franchise sales, consulting, and business valuation services. More information is available at www.sunbeltmidwest.com.
