By Norman A. Pappas
March 1, 2006
Exit strategy means many things to different people. It can mean retirement. It can mean a sale of your business. It can also involve death or disability. In this article, I will focus on retirement.
Retirement planning can be about asset protection, wealth transfer, charitable gifting, wealth management, and business succession planning. There are many landmines to be wary of as retirement approaches. If you are a business owner, you are probably aware of the grim statistic that 70 percent of all businesses fail to get to the second generation and 85 percent fail to get to the third generation, because they don’t have a succession plan. To avoid this, you will need to plan ahead on issues such as whether your business should be sold, liquidated, or kept. If the business is sold, key questions are: To whom (a stranger, to key employees, or to an employee stock ownership plan), for how much, and on what terms.
If kept, the key questions are: who will run the business? Who will get stock ownership? How do you keep the estate taxes to a minimum? How do you equalize inheritances between children who are working in the business and those who aren’t? And importantly, how will your retirement income be paid?
Business owner or not, if you have a pension or profit sharing plan, or a 401K, they can be rolled over to your personal IRA at retirement. You then have decisions to make about beneficiary designations, distribution rules, and how to invest the funds. Should your beneficiary be your trust, your spouse, or your children? Pension plans and IRAs are subject to a double tax-income and estate taxes. If your spouse or children are your beneficiaries, they can roll your IRA into their own IRA to stretch the income tax over their lifetime. When should you take distributions, and how much should you take?
Distributions can be taken as early as age 591/2. If taken prior to 591/2, a 10 percent penalty tax is imposed. You can defer distributions to age 701/2. At that time, a minimum distribution is required based on IRS life expectancy tables. Failure to take the minimum distribution results in a heavy penalty. If you have a pension plan, do you take it over the joint lifetime, or do you take it over your lifetime of you and your spouse?
Managing your money is also key. You may need to reallocate your portfolio as you approach retirement, determining the answers to questions such as: How much should be in stocks versus bonds? What should your portfolio structure look like (value stocks versus growth stocks)? What funds or money managers should you use? What are the tax consequences to your decisions?
Retirement decisions also involve when to take social security (age 62, 66, or 70). What about your medical insurance? What will Medicare provide? How will you pay for prescription medicines? Can you really afford to retire, or are you going to have to work longer? In short, will your income cover your expenses?
Other than financial issues, there are many lifestyle issues to consider. What will you do with your time? Will you do volunteer work? Get another part time career? Will you move or get a second home in Florida or Arizona? What role will your health and family play in determining where you should live (i.e., long-term care planning, if you need assistance at home or in a facility)?
With so many questions, who do you go to for advice in all of these areas? Is it a retirement specialist or a financial advisor?