Managing Your Own Plan... Are You Ready For This?

Q. In searching for a local financial planner, I found your website and read some of your Q&A postings. My wife and I are looking for an independant professional to review our finances and provide us with a plan that we would manage ourselves as we prepare for retirement. Our net worth is about 500k including home and business equity. 70k is in retirement acounts, 35% equities and 65% funds, and about 65k is in surrender value of life insurance. Our combined salary will vary between 115-200k over the next 5-8 years. I'm 50, and my wife is 45.

A. When you mention that you are looking for a plan, do you mean you want all the spreadsheets that show that if you save X per year and earn Y that you will achieve Z?

I've done plans like that in the past but have found they haven't been that useful to clients in the long-run. Sometimes they provide a false sense of security...

If that is what you are looking for then I probably am not your guy. On the other hand, if you are wanting someone who will look over your situation and point out weaknesses/adjustments that should be made, then I am happy to do that.

Along the way I can share information about what you need to do to achieve a comfortable retirement, etc.

You are at a very important time and the decisions you make the next few years will greatly impact your ability to retire.

Q. Yes, this is exactly what we are after. A knowledgeable person and advice to address our weaknesses and suggest adjustments. Feel free to call anytime, just say #### is expecting my call.

A. A few thoughts (after a relatively brief phone conversation)....

There are several things that come to mind, so I will just throw them out for your consideration.

It sounds like you will be relying on the business to provide a big portion of your retirement assets. Businesses are valued based on their profitability times a capitalization rate plus the value of assets and inventory. Sometimes you can price in some goodwill, but that is difficult to do. It is also difficult for people to get financing for such a purchase so it might be hard to cash out and there are a lot of issues with carrying the note.

Even if you think it is 10 or more years away, you need to start putting a transition plan into place. There are two key areas that need to be dealt with--your premature death and the retirement exit strategy. Since the business has significant value to your estate it is important the there be a way for it to continue in the event of your death until it can be sold. It can take years to sell a business unless you want to make it a fire sale.

Are there any employees that would be able to run the business in your absence? Would it be possible for your wife to hire someone to take your place to keep the biz running smoothly until sold, etc. The more you can put together a plan the easier it will be for all concerned. For instance, you wife will need to know where she can find all of your passwords and where you have the important files stored, etc.

As far as the sale, it will be best by far if you can find an employee(s) that will want to buy you out. If possible you can even structure it so that there is a general transition. If not, you will want to start preparing your balance sheet several years in advance of pursuing an outside buyer. Profitability is the key. If you were looking at buying your own business and were wanting to maximize your return on investment, what changes would you make? Are there market segments that aren't generating enough return to justify the time, effort and expense? If so, do away with them. Can you get by without all the employees? If so, eliminate some positions.

You will want to have 3-5 years of great looking balance sheets to get a good price when you go to sell.

There are also issues with the ownership structure between you and your father. If he were to die, will you inherit his 50%? Would the note on the building be forgiven? If you won't inherit the other 50% and will need money to buy out siblings then that needs to be addressed so you aren't caught in a bind. Either way, it will be important for those shares to transfer as quickly and easily as possible. That means that your father should have a living trust and the living trust should own the shares of the Sub S. That way, the shares can be transferred almost immediately after his death without the involvement of attorneys or the courts.

Maximizing the profitability will help you with the next need, which to to begin putting away as much money as possible for retirement. Depending on how much you will be able to put away we may want to look at a different type of retirement program---probably a SEPP instead of a simple so that you can maximize your before-tax contributions. You will also want to max out ####'s as well. Obviously, this will be much easier once college costs get behind you...

Insurance. This relates back to the biz contingency planning. It appears that if you were to become disabled that the family finances would be greatly harmed and the ability to put aside additional money for retirement would end. In other words, you would face pressure with both current and future income. You should look into some long-term disability insurance. It is normally pretty expensive. You might want to look into some sort of company benefits package that would allow employees to purchase LTDI as well because it might give you group rates.

Life insurance. You are terribly underinsured. You currently have only about 3 times your annual salary and that doesn't count have enough funds to pay off debt or provide for #### longer-term. If you were to die she would be in a world of hurt.

Without even sharpening a pencil, it is easy to see that you should probably have at least $1.5 million in insurance. There should be much more in key man for the business as well. I would think you would want enough to cover payroll and overhead for about 6 months.

That being said, don't buy whole or universal life. In your case you want as much coverage as possible for the least cost. That means you want term insurance. You can get it from companies like First Colony,etc fairly cheaply. THIS IS SOMETHING YOU SHOULD START IMMEDIATELY. You can check the internet for companies like Zurich direct, etc.

Once you get the term coverage you can then get rid of your whole life/ UL policies. That is expensive insurance and it will free up those funds to use to cover the cost of the term.

#### should probably have several hundred thousand dollars in insurance. Have her check to see how much she can get through her job, even if she has to pay for it.

Estate Planning. There are some issues here. If you were to pass away, it will take #### quite awhile to be able to do anything with the business from an owner's point of view because your shares would have to go through probate before they went to her. If the company building is titled in the Sub S that would have to go through probate as well (technically it wouldn't go through probate, but the shares of Sub S would have to go through probate to go to ####).

Because of this, it will be best for you and #### to have a living trust as well. That way the transfer is seamless and there will already be someone set up to manage assets should one or both of you become incapacitated. In the process of getting a trust, your wills will be updated and you will also get all the necessary powers of attorney.

I hope I haven't overwhelmed you....and this is just from the brief conversation. Your biggest weaknesses have nothing to do with your investments at this point.

Your posted comments on this and other questions are welcome.
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