Selling my company. Immediate annuity?

[Pjman]

I've been working on my company for a dozen years. I had a buyer approach me and offer me a pile of money. At the end of deal and taxes paid I will 2.8 million. I and my wife are 38.

I was thinking of going with an immediate annuity for life. That would my wife and I 154,000 a year for life.

Does anyone have any better very safe ideas? With the interest rates where they are at, I can't find anything as safe and a high payout.

Thanks for any input you can offer.

 

[REWahoo]

No way would I spend the money on an annuity, at least not more than a small percentage. Inflation will eat your lunch. After 23 years of 3% annual inflation your purchasing power will be cut in half, turning your $154k into what is only $77k in today's dollars when you hit your 60's.

Maybe a better idea for a super conservative investor would be a ladder of CD's so you can take advantage of what may be better interest rates over time.

 

[MasterBlaster]

A few Points...

1) REWahoo's point about inflation assumes mild inflation. If (and it's not certain) we get the whopper inflation that some see coming it will be much much worse than REWahoos example.

2) Safe is a relative term. You probably mean safe from loss of principal. What you ignore is safe -from loss of purchasing power. CD's and immediate annuities are (after inflation/after yax) losers when it comes to purchasing power.

3) Perhaps a mixed portfolio or the buckets of money approach would work better for you. You need to educate yourself about this stuff. It's very important.

4) Their is no sure formula for success. Every one of them have pitfalls.

 

[HatePayingTaxes]

I believe each state has a limitation on how much your annuity is covered in case of default by insurance company. For CA, I think it was only 100k per person.

 

[donheff]

Wow. Tough situation. That $154K sounds great but the others are right: in 20 years it will have half the purchasing power. Unfortunately, the $154K/yr benchmark is stuck in your head now so you may not be happy with less. Sounds like you need to scale back your spending to say $100K and maybe go with 50% in an annuity with increasing payments (e.g. +3%/yr) and 50% in a balanced portfolio. Or keep working until you have enough to generate that $154K with inflation increases. Even if you take the later approach that big nest egg gives you some breathing room to do only what you like I will be interested to hear what you do.

 

[East Texas]

Rates are just too low right now to get an immediate annuity. I have our money parked in IRAs until the market improves.

 

[clifp]

Using FIRECALC with a 50 year run, some reasonable assumptions about Social security and the 95% rule, I get withdrawal rates of 105,000 on 2.8 million portfolio.

I'll wait for the OPs second post before I dig deeper.

 

[Moemg]

Congratulations ! I would agree with Don and bring your expenses down below the $100,000 level . You will be retired a long time and a 3% withdrawal would be safer .

 

[Grizz]

At 38 I was doing the same thing as you with my business, for about the same $ amount. My deal fell apart because the economy was starting to get shaky at that point.

One of the conditions in almost all sales is that the new owner generally will want current management to stick around for at least a couple of years. If this is indeed the case, why not rely on your regular salary to cover living expenses for a while and invest the $2.8 slowly and methodically over the next 5 or so years into a portfolio of 60% stocks (stock index ETF's) and 40% bonds

That should provide you with some stability and protect against sudden surprises. It isn't sure fire, but nothing is. All that you can look at is history when planning a financial strategy. Though boring, the 60/40 split has proven effective long term, and you most certainly are looking long term.

As an aside, I recommend that you have a look at a book called How to Retire Happy, Wild, and Free. It has virtually nothing to do with retirement finances. It will however, help you wrap your head around the concept of very early retirement.

Best wishes, I'd like to hear how it goes...

 

[chinaco]

I believe SPIA can be a valuable part of a retirement income plan. But I would not put all of my money into a SPIA.


Look at Jim Otar's book "Unveiling the Retirement Myth". He does a pretty good job of describing the common options for generating retirement income along with the the pros and cons. Depending on your income needs and assets... he has a formula that he developed that is intended to give one an idea of how much money they might invest in a SPIA in certain circumstances.


Take your time to educate yourself before you make any major decisions. Depending on your financial capability.... there are several viable options.

There are many books on the topic of investing and managing income and assets during the withdrawal phase. Educate yourself, create a plan, then review the plan with someone (competent in finance) before you commit to anything permanent.

 

[WB52]

Congratulations! You are in great shape, financially. I'm sure you will research how to invest and will likely go with a safer equity/bond mix. The important thing now will be for you to decide what you want to do with the rest of your life. What new goals?

 

[e86s54]

PJman,

IMHO, I would not make any quick decisions. You are young and there are likely many changes coming down the road for you both.

As a business owner, I know how heavily engaged us individuals are and how quickly bored we can get as entrepreneurs typically start businesses for the challenge and making money. So patiences and not limiting your options should be your new goal.

Your guys are in great shape and I wish you both the best in your future adventures!

 

[jayc]

Good job on building a successful company. Just a quick back of the napkin calculation. Putting all into 30 year treasury at 4.3% gets you 121K/year and you get to keep your 2.8 million and be safe. The payout is 33K less per year but you have 2.8 mil to dip into to make up the difference.

But as others have said, I would do nothing now, educate myself, and pick an AA that you are comfortable with and manage it myself.

 

[Webzter]

I'd say find a recommendation for a fee-based financial advisor and set up a meeting before making any money moves. I'd imagine your attorney or CPA might have a recommendation or possibly a friend.

 

[FreeAtLast]

I don't know if the following is possible but,

I would try to get a P/T consulting position during the transition of the sale of the company for perhaps a year. This would allow you to put the money from the sale somewhere safe and have time to think about what you want to do. You will be getting some income from the consulting position and the work will probably be easy for you.

My local druggist sold his store after many years. About 6 month later he is back at work part time and has been doing this for several years now.

 

[Pjman]

Wow this some community here... 1000thanks.

You guys have some great ideas. To share the rest of my story:

I ran an Internet company for the past 12 years. i basically found a way to produce massive amounts of quality content in my niche for a fraction of the costs of everyone else.

Business really picked up. Last year I made $450k. I had buyers approach me left and right, but this buyer offered a good sum and is super serious.

They want to keep me on for the next five years. @ 75k a year. So I'll have a decent income.

I like the the bond and cd idea, but you are right I should hire a per diem finanacial consultant. Any good ideas on how to go about it?

I have used some big name firms in the past, but they only push their funds and their funds stink.

 

[brewer12345]

Pjman, I would go to www.napfa.org and look up some nearby fee only planners. Interview several, ask for references, what their approach is, etc. and find one you feel comfy with.

 

[Independent]

An SPIA is a lifetime, non-revocable commitment. No way would I make that kind of decision when my mind is full of all the considerations involving selling a business instead of all the considerations involving lifetime investing.

In general, an SPIA beats bonds only when you are far enough out on the mortality curve for the mortality credits to become noticeable. People will argue about whether that age is 65 or 75, but I'm sure it's not 38.

Park the money in CDs or vanilla indexed funds while you learn about your options.

(Almost forgot - Congratulations!!)

 

[LOL!]

You guys have some great ideas.
...

I like the the bond and cd idea, but you are right I should hire a per diem finanacial consultant. Any good ideas on how to go about it?

Now that you aren't working so hard, maybe it is time to learn about investing, so that you might be able to judge whether you are getting ripped off when it comes to hiring someone. I'd recommend you start here:
Bogleheads Investing Advice and Info but be prepared to read some of the recommended books. There is even a "Getting Started" link.

Consider this: You have another 50 years or more to go. Don't you want to spend more than 15 minutes figuring it out? Would 2 months be too much time to take to figure it out? Or how much time to this do you think you should devote?

 

[clifp]

Pjman, I would go to www.napfa.org and look up some nearby fee only planners. Interview several, ask for references, what their approach is, etc. and find one you feel comfy with.

+1 on this and also talk to your CPA.

I retired at similar age 39, with similar assets at the last tech/internet bubble. Although, I was reasonably savvy investor, my retirement planning basically consists of saying hey If I use most of my money to buy muni bonds I can generate $100K/year in tax free income "I'm set." Very similar to hey I can buy a SPIA that gives me $156k, "I'm set" I learned a lot my last 6 months as I was retiring in place and even more the first year or two of being retired.

You have a nice chunk of change at young age. Rule #1 is to invest in your education and rule #2 is to avoid doing anything with all of your money. The 5 year contracting period gives you plenty of time shift your focus from your job of building your business, to your second job of making sure your money is working hard for you so you don't have to.

The tax complexity of selling a business for that type of money alone are complicated. Be very suspicious of anyone that says I've got all the answers to your money needs. The board is very useful for keeping you from doing stupid things, less useful for telling you what to do. Especially because your situation is more complicated than most.

 

[FreeAtLast]

The 5 year contracting period is great. Take your time to figure things out, get a budget together and learn more about investing.

There is plenty of good information here.

 

[Pjman]

My thoughts exactly.

The board is very useful for keeping you from doing stupid things, less useful for telling you what to do.

You guys did save me from myself. Thanks. I'll keep you updated on what I learn.

Right now I see that if I go the immediate annuity route, I'm looking at either my wife or I living another 50 years; in all likelihood

So that means a payout of $154,000 x 50 = $7,700,000
(2,800,000 tax free) so that's the tax equivalent of:

$8,540,000 Now I just need to figure out how I can make a little over 3 times my money in 50 years. Time to hit the books.

So I have to beat 2.2% interest over the 50 years.