Asset allocation after the sale of a business

[Jerseytunahunter]

Hi Everyone I did a search on this and did not see an older thread. This is my story-
I'm planning to FIRE in three years at age 59. Right now 17% of my assets are real estate equity, 15% cash, 401k, IRA, and 68% the value of my company. I've been in business 37 years, we currently have 82 employees. I have a good team in place and do not work in the day-to day operations anymore. I'm working on making my business as "pretty" as I can to increase my EBITDA and multiple. It's standard in my industry for the owner to stay on for a year of transition, so I would engage a broker in 2021, and retire in 2022. At that point my wife and I will have more than enough monthly income and healthcare is not a problem as she is a retired teacher. I met with my CFP and he is recommending the following investment strategy after we close the deal:

30% bond (safe and gauranteed income)
20% insurance product like Metlife (same)
50% stocks

Any proceeds from the stocks side would go on the safe side, thus diminishing the risk a little each year. We also would leave the real estate alone as we have good income there. What does the ER braintrust think?

 

[COcheesehead]

Depending on the business it may take longer than a year to sell. I sold my business to a group made up of 3 key employees. No broker involved. No disruption to the business.

As for your allocation, I have always looked at it backwards. We do I want to spend, what allocation gets me there at the lowest risk. Some call it the efficient frontier.

 

[OldShooter]

Assuming that you are getting mostly cash for your company and/or your total estate is below the federal estate tax point, you have little or no need for liquidity in your estate. So a straight insurance product like term insurance is unnecessary.

"Insurance product" like "annuity?" The main beneficiary of an annuity "insurance product" will the be salesman. Variable annuities are almost always a financial disaster for the buyer. Fixed annuities can be debated if the fees are low enough but in general you can do better by investing the premium on your own. Download the prospectus for the "product" and see if you can understand it. If no, then pass. Also do a full text search for the word "fee."

Note that a CFP is not legally a fiduciary. He/she may be a fiduciary by virtue of being a registered investment advisor or a registered advisor representative. Be sure to understand your legal relationship when evaluating any insurance purchase. Also, be sure to run him/her at brokercheck.com if you have not already done so.

 

[38Chevy454]

X2 on what does "insurance product" mean? If annuity, I would question the need and motivation. Especially as stated it is typically for salesmen, not for recipients.
What is your risk tolerance and how much is your required withdrawal rate?
Seems to me that you could do 70/30 and self directed. Fire the FA and DIY. Read up on the forum, educate yourself and reap the rewards yourself.

 

[pb4uski]

50/50 is fine... I would skip the insurance product (I'm guessing a annuity of some sort, perhaps a variable annuity) and just go with mutual funds or ETFs or even a balanced fund.

35% Vanguard Total Stock, 15% Vanguard Total International Stock and 50% Tptal Bond would be a place to start.... or even easier a 50/50 blend of Wellesley and Wellington would end up about 50 stock/50 bond.... or even easier put it all in the Vanguard Target Retirement 2020 fund and go have fun.

 

[CaliKid]

Insurance products may be suitable if you have a very large estate and are buying whole life insurance in an irrevocable life insurance trust. These days that's probably $20m+ for a couple so the .000001% of the 1%. Otherwise probably just a big pay check for the salesperson as indicated above by others.

 

[Jerseytunahunter]

TY for the replies. A little more info; yes he was talking about an annuity for tax free growth. In his example if I invested $2M it would return $100k/year. As far as withdrawal, we will not be spending our base, but adding to it each month. This is even before considering SS, so I guess my main focus is wealth growth and preservation. My DW and I set up a trust, we have term life in place. Not worried about the sale, there are a lot of interested parties. It's really about fit and who will take care of my people and customers the best. Since the E-R community loves acronyms, my guy is a CFP, AIF and CRPC

 

[DrRoy]

50/50 is fine... I would skip the insurance product (I'm guessing a annuity of some sort) and just go with mutual funds or ETFs or even a balanced fund.

+1

 

[pb4uski]

TY for the replies. A little more info; yes he was talking about an annuity for tax free growth. In his example if I invested $2M it would return $100k/year. ....

Well, to begin with... an annuity is not tax-free growth (unless in a tax-free account like a Roth IRA)... it is tax-deferred growth but the growth ultimately gets taxed at ordinary tax rates... I'm guessing in your situation probably 24% or more. OTOH, qualified dividends and LTCG will get taxed at 15% and if you own some foreign equity funds in taxable account you also get the foreign tax credit.

The problem with annuities is that if you want or need out for some reason, surrender fees can be hugely expensive... starting at 10% or more and declining over 10 years or so.... so if your $2m grows to $2.3m in 3 years and you want our you might get back $2.1m and the $0.1m of gain is taxed at 24%. I would stick with bonds held to maturity and CDs or perhaps a government or investment-grade bond fund for your portfolio ballast. One poster here also advocated TIPS as a good solution for ballast.

 

[OldShooter]

... As far as withdrawal, we will not be spending our base, but adding to it each month. This is even before considering SS, so I guess my main focus is wealth growth and preservation. ...

So you have no need of the "permanent income" that is a main selling point for annuities. If that is the case, why remove $2M from your estate in the hope that you will live long enough (25+ years) to win the bet? Do not let the tax tail wag the investment and estate dog. Really, this is sounding more and more like a welfare program for the FA.

... My DW and I set up a trust, we have term life in place. ...

Just curious: Why life insurance? Most of us IMO have dropped our life insurance years ago due to lack of need. The main reason I know of to have life insurance late in life is to have estate liquidity sufficient to pay estate taxes. That does not seem to be the situation here.

... Since the E-R community loves acronyms, my guy is a CFP, AIF and CRPC

Well, at this stage that really doesn't matter. It may simply mean that he is good at multiple choice tests. The key question is whether he is a fiduciary or not. If he will not state this in writing, get out of there. If he is not a fiduciary he has no obligation to put your interests ahead of his own.

... One poster here also advocated TIPS as a good solution for ballast.

Me maybe? I believe that runaway inflation is a low probability, high impact, risk for any retirement plan. It's out of scope to discuss here IMO but I believe TIPS are incredibly cheap insurance; i.e. cost to mitigate the risk is low.

 

[Jerseytunahunter]

I'm not familiar with bonds or annuities so this has been very helpful. For now I'm meeting with my advisor a few times a year just to get the plan started. We're talking about a lot of things including 1031 exchanges etc. The life ins policies were set up 10 years ago when we created the trust. They were put in place to cover the company debt if I passed.

 

[pb4uski]

...Me maybe?...

Yes.

 

[OldShooter]

Yes.

@pb4, what kind of commission do you think a salesman would collect on a $2M annuity ticket?

 

[pb4uski]

At least $100k... perhaps even $150k.