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40 and need a reality check
Old 12-04-2009, 08:54 PM   #1
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40 and need a reality check

I’m a 40 year old business owner and need help. My wife and I currently own 3 business and we want to slow down and relax in 3 years.

1)A rental company that’s an s-corp that we hold 5/6 of the shares. The landlords (husband and wife) hold 1/6 of the shares. It has 36 duplexes (valued at $325,000 each) and 20 houses (valued at $300,000 to 450,000 each). One 4 unit strip mall (leased out to our companies). Company 2 dose all the maintenance to the units. Currently has .9 million in loans in the 3.9% interest rate range that we dump as much of the companies money in as possible. Brings in about $80,000 in rent a month.

2)A house flipping, custom wood work, and light remodel company that’s an s-corp that we hold 4/6 of the shares. I have 4 employees that split 2/6 shares. We currently have 12 houses in different stages of flipping. If they don’t sell with in 120 days company 1 normally buys them. Current loans are in around $300,000. This year it should make about 1.5 million before taxes a year.

3)A pottery business that’s a sole proprietorship that’s more of my wife’s hobby than anything. No employees or anything that might make $5,000 a year.

I spend 80% of my time in company working in company 2. My wife spends about 50% of her time in company 1 and plays in company 3 when she wants to. We have 2 kids 15 and 17 that help out with what ever is needed.

Untill about a week ago we never thought about anything that was more than a few years away. Were thinking in 3 years I want to turn business 2 into a custom wood working, cabinet shop with possibly two employees witch will be a huge income and stress loss. We would split the work in business 1 and she would do what every she wants with business 3.

This year it looks like business 1 will get 15,000 to 20,000 per 1/6 share bonus and business 2 will between $50,000 to 55,000per 1/6 share all depending on the annual share holders meetings next week.

Our current investments, income, and junk…
$19,500 in a collage fund for the kids
$60,000 in IRA with Mid to mild investments
$45,000 HSA
$2.8 million in stocks; GE, utility companies, ford, Exedy and a few others
Own our 5 bedroom “off grid” house with 10 acres of land
$50,000 in cash and CD’s
Credit ratings are 800 to 830
Yearly income is around $450,000 and around $275,000 twice a year in bonuses a year.
5 cars/trucks $20,000 in loans


So far our retirement plan consents of paying off our truck loans with our bonuses and investing the rest in something. Were planning to investing our bonuses for the next 3 years in something.

What should we invest this bonus (will be getting them next week) in this year and what changes should we make in our current investments? I don’t plan on social security being around when I’m at age to receive it at 88 or what ever it is.
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Old 12-04-2009, 11:27 PM   #2
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I believe bonuses are taxed at a higher rate than normal income, as such, I would suggest you use any tax deferred vehicles you have access to, be used for the bonuses. This includes your HSA, your IRA, and possibly some sort of solo-401k of some sort (not sure if you can set this up within one week though, it is somewhat complicated). I know that small business owners have various options for setting up a 401k type system, but I am not certain which one best fits your needs, or if one fits your needs at all, as they do have costs as well.

As for investments, it seems you have made some good picks, such as Ford (luckily you did not choose GM, or some sort of automotive sector fund). However, I think you may have too much uncompensated risk in your portfolio. It sounds like you have a small collection of all large cap stocks. Additionally, you are in a very high tax bracket and have most of your money in taxable accounts, as such, I think that, even if you still wish to maintain a very aggressive portfolio, you would be much better off with some sort of tax-managed index fund. This at least would reduce the amount of highly taxed income generated, and protect you somewhat if large cap does poorly, when other areas of stock do well. Obviously, do this through a low cost index fund (passive), the higher cost managed funds provide you no additional benefits.

If you wish to decrease your risk, which you may want to do if you are somewhat closer to working significantly less, you can diversify further by obtaining some bond funds, and have them be tax exempt ones if you are putting them in your taxable accounts.

After figuring out a proper allocation, and there is certainly more to it than just the broad outline I drew, you won't need to watch your funds, just stick to whatever allocation of stocks/bond (e.g. 60/40), by rebalancing them once a year, as they will increase/decrease at different rates. Doing this will let you concentrate on your buisness, or your hobbies, without having to worry that your funds may do significantly worse than the market (and the market usually does fairly well, in the long run).
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Old 12-05-2009, 01:28 AM   #3
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Yes the bonuses are taxed at a higher rate. We have already maxed out my HAS, collage fund, and my IRA this year.

I did have a large amount in Government Motors but luckily I got out of them before they went belly up. Exedy is one of the top 5 “wet disk” (auto transmission and clutch parts), clutch, torque converters, springs, and other stuff auto/train/plain/motorcycle type stuff that’s biased in USA and Japan; they also own “Dynax”.

Yes you guessed right and I’m in a very ridicules high tax bracket. I’m game for transferring my stocks into 2 or more managed accounts so I could have them at different risk levels.

After looking up the solo 401k it looks like we could sink about $45,000 each a year. It also looks like I would be better off with a SEP IRA. *** Warning*** I learned about both of these in the last 20 minutes so I might be talking out my butt.

I have read that I can file an extension on my taxes if needed as long as I start to set up the account before the end of the year.

Would it be worth paying someone to help set up some funds? Who would I go to?
What are some funds that are wroth looking at?
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Old 12-05-2009, 03:58 AM   #4
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Would it be worth paying someone to help set up some funds? Who would I go to?
What are some funds that are wroth looking at?
Keep researching about the SEP/Solo funds, and other options, it will probably take a good bit of research, and it could help you shelter much more money than you can shelter in an IRA or HSA.

In the long term, the best thing you can do is develop an investment strategy the benefits you the most. While some financial advisers are good, and look out for the clients best interests, a majority of financial advisers are more akin to salesman, they have certain products, in this case funds, some of which they simply make a lot more money from than others, generally at the client's expense. If you really want to get a financial adviser's advice, go only for the advice. Do it with one who will only charge you a fee for constructing a potential plan for you, which you can then you can check whether it is a good plan, and if it looks like it is a good plan, simply setup the funds yourself.

That said, it takes a little bit of reading to be able to understand why a certain asset allocation is better for you than others. As some adjustments will have to be made each year, especially when there are drastic changes in your income. You can do this either by picking up some of the books suggested on the forum, or by browsing the forum and asking questions as you go along.

The favored approach of most on this forum is to use low-expense Index funds. What sort of asset allocation you setup from there will be based on how soon you expect to keep working, how much risk you want, etc. Once you have this figured out, you will save yourself a lot of potential lost income on the market. If you would like an example, one fund which makes up a significant portion of the equity portion of many investors portfolios is (or something very similar to it): VTSMX - Vanguard Total Stock Market, they will also generally have some international, and some bonds. Many will also have REITs, but I don't think you really need those, as you are already very heavily invested in the real estate market.

As I said before though, you have some significant tax concerns in your taxable account, you will definitely want to look at whether tax managed stocks are a worthwhile investment for you. Another site you can do some research on is Bogleheads Investing Advice and Info. The Retire Early forum and Bogleheads is where I learned most of what I know about investing. Bogleheads is actually more focused on the accumulation (working) stage.
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Old 12-05-2009, 08:35 AM   #5
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Originally Posted by jessy View Post
After looking up the solo 401k it looks like we could sink about $45,000 each a year. It also looks like I would be better off with a SEP IRA. *** Warning*** I learned about both of these in the last 20 minutes so I might be talking out my butt.

I have read that I can file an extension on my taxes if needed as long as I start to set up the account before the end of the year.

Would it be worth paying someone to help set up some funds? Who would I go to?
What are some funds that are wroth looking at?
You want to do a lot more research into what works best in the way of retirement funds. Vanguard or Fidelity is your best bet. Just found a link for you. I don't know how accurate all of the information is, but it gives you an idea of how complex the decision will be.

In my SEP with Vanguard, I have Total Bond (VBMFX), Total Int'l Stock (VGTSX) and Total Stock (VTSMX).

I have a SEP because I started it befroe there was a solo 401k. Of late I've gone to full-time employment (has 401(k)), and I don't have the self-employment income I once had. If I was making the choice today, it would be solo 401k.
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Old 12-05-2009, 10:10 AM   #6
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Remember I don’t know what I’m talking about.
By the way it looks like my tax bracket will be 35% this year.

After looking at fidelity and vanguard’s websites both of there calculator point me in the direction of “traditional IRA” biased of there 6 question. Right now were leaning towards using vanguard.

We will keep reading up through our fun day of sitting around during an open house during a light snow dusting. But the bright side is that 2 different types of coolies are coming out of the oven every 30 minutes or so. As long as the stuff were reading keeps adding up we will be opening an account before we go to bed.
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Old 12-05-2009, 12:47 PM   #7
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No advice but welcome to the boards!

You said:

Quote:
Untill about a week ago we never thought about anything that was more than a few years away.
Did something happen a week ago?
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Old 12-05-2009, 01:18 PM   #8
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Remember I don’t know what I’m talking about.
By the way it looks like my tax bracket will be 35% this year.

After looking at fidelity and vanguard’s websites both of there calculator point me in the direction of “traditional IRA” biased of there 6 question. Right now were leaning towards using vanguard.

We will keep reading up through our fun day of sitting around during an open house during a light snow dusting. But the bright side is that 2 different types of coolies are coming out of the oven every 30 minutes or so. As long as the stuff were reading keeps adding up we will be opening an account before we go to bed.
Did you find the small business link that covers individual 401(k), SEP-IRA, etc.? In the 35% tax bracket now, I think you'll want to take advantage of delaying as much tax as possible. For each dollar you invest in a retirement plan, you'll reduce your tax now about 35 cents for each dollar invested. A traditional IRA is limited to 5K. The other plans will let you and wife go far beyond that.
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Old 12-05-2009, 01:46 PM   #9
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Bestwifeever
One of our friend’s wives is trying to set up a women’s week crews. My wife wants to go but she feels that she needs to be around to help run stuff. We decided that we need to down size over 3 years so we can get our finical ducks in a row.

Target
When I went back and looked at what I was looking at I was confused. Yes I did see that comparison.

I think my problem is that I have read too much stuff don’t understand much of it and have gotten a few to many brain farts.
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Old 12-05-2009, 07:41 PM   #10
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We filled out the paper work to set up a SEP-IRA with vanguard. It should be in the mail Monday morning.

She’s also thinking about moving some money out of our stocks in to some managed funds but we still have a lot of reading to do on them.

Thanks for the help and I’m sure I will have more questions.
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Old 12-05-2009, 08:20 PM   #11
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With your income and assets why wouldn't you just hire a top CPA, pension firm, tax lawyer, etc.?
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Old 12-05-2009, 08:36 PM   #12
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Bestwifeever
One of our friend’s wives is trying to set up a women’s week crews. My wife wants to go but she feels that she needs to be around to help run stuff. We decided that we need to down size over 3 years so we can get our finical ducks in a row....
You sound like a very busy family! I'm glad your trigger to look at your financial future was something fun like having time for planning cruises--I was afraid there was a health or financial crisis in your life.
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Old 12-05-2009, 09:33 PM   #13
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In the last 4 years we have hired 5 tax lawyers and 3 CPA’s that were highly recommended and work with clients with about the same income as us. It seams that they get so lost in us not doing anything for years they can’t come up with some kind of plan. Our book keeping is spotless on access and I can generate any document if you tell me what you want on it and how you want it set up. We also have all of our paperwork scanned and organized that is easily searchable.

We have had the same lady do our quarterly taxes and payroll for the last 8 years. We have asked her for help a few times and she says she would not know where to start with that much money. After she dose our yearly taxes we go to a second place to get the year double checked.


Bestwifeever
She just feels guilty going away for more than a few days. She knows that everything will be handled. Everything runs smooth but sometimes I get a bit behind getting everything scanned and entered in to the computer.
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Old 12-05-2009, 10:02 PM   #14
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In the last 4 years we have hired 5 tax lawyers and 3 CPA’s that were highly recommended and work with clients with about the same income as us. It seams that they get so lost in us not doing anything for years they can’t come up with some kind of plan.
You may want to consider talking to a pension consulting company. There are generally much more sophisticated things you can do beyond a SEP and higher limits you can tax defer with incomes like yours, such as your own 401K plan or maybe a defined benefit plan. A good pension expert should be able to help with what you can do within your current mulitple s-corp structures.
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Old 12-05-2009, 10:38 PM   #15
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I have never looked at a pension consulting company. It’s defiantly something that I need to look at. Thanks for the suggestion.
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Old 12-05-2009, 10:44 PM   #16
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jessy, what you need is a good financial planner, not a CPA or lawyer. Look for a fee-only planner and interview for someone you are comfy with and who can help you formalize your goals and craft a plan to get there. I get the sense that you have been so caught up in daily life and growing your businesses that the long term has been ignored. A good planner should be able to help you sort things out.
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Old 12-05-2009, 10:55 PM   #17
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I have never looked at a pension consulting company. It’s defiantly something that I need to look at. Thanks for the suggestion.
We have 2 businesses and it has been well worth the money. You may also want to read the Nolo Press books on retirement plan options so when you interview consultants you know what questions to ask. Some are really just sales men. The person who helps us is an actuary.
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Old 12-06-2009, 03:28 PM   #18
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I second the suggestion about a pension consulting company. I don't live in the US so am unfamiliar with the relevant regulations but if they are anything like the ones in Canada you should be able to set up and expense an independent corporate pension plan in a tax efficient manner....with the right expertise.
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