For the past three years, I’ve helped approximately 20 business owners develop a financial plan for their wealth after selling a business. It may seem paradoxical, but I’ve found that managing their wealth after the sale is often more complex than while they were running their businesses. They often have several million dollars to manage, and if a major mistake is made, there’s no time to fix it.
Some business owners don’t see it that way. They are ready to ease off the gas and foresee part of their retirement overseeing their money. I even had one recently say, “If I’m selling my business, why do I still need a financial adviser to help manage my affairs in retirement?”
On the surface, it’s a good question. But for the first 10 years after selling a business or medical practice, many owners face some key financial decisions about health care, charitable giving and simply how to use their newfound freedom wisely.
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In addition to providing solid financial advice, an adviser can act as a coach to help the new retiree enjoy his or her life. For those who are selling, here are a few recommendations to consider:
Evaluate All Your Health Care Options
Many owners exit their business well before being eligible for Medicare at age 65. Prior to retiring, many either receive coverage through a company-sponsored plan or get it through a spouse’s employment at another company. If they are younger than 65, they won’t qualify for Medicare and need to seek insurance on the open market — which often can cost tens of thousands of dollars annually for them and their spouse.
Working with a team of experts, including insurance brokers, a financial adviser can help them find comprehensive health insurance at an affordable price. For example, I work with a client whose beloved wife has Type 1 diabetes and other health concerns. As a result, the couple have expensive prescriptions and specific doctors and hospitals that are providing the care she needs.
To find the best care at the lowest cost, I connected them with a health insurance broker to analyze their options, making sure her medical benefits included her exact prescriptions and doctors. After that, we were able to forecast the costs using their new medical plans to project their retirement cashflows. They are entering retirement knowing that she will be able to continue the wonderful care she's received without having to change providers.
Maximize Income from the Business Sale
Many owners generate enough profit from their sale to live off the cash for several years. And many have accumulated a large amount of savings in their retirement accounts.
One post-sale strategy I implement often is to convert a significant amount of money in pre-tax accounts to Roth IRAs. For example, one client recently sold his dental practice at age 62 for a substantial amount of money, enabling him to live on the after-tax proceeds for almost 10 years.
During those 10 years, we converted enough money into Roth IRAs each year to stay below the higher income tax brackets. As a result, he accumulated about $1.5 million in his Roth IRA by age 72.
Set up a Charitable Donation Giving Strategy – and Involve Your Family
As the stock market has soared, many business owners have seen their portfolios grow exponentially over the past 10 years, making it the perfect vehicle for a long-term charitable giving strategy.
Here’s a great example. For many clients in the year the owner sells the business, we establish a Donor Advised Fund that earmarks charitable contributions for several years. Using a strategy called “charitable bunching,” the owner makes a significant donation in the year of the sale.
This donation – often in the hundreds of thousands of dollars – is more beneficial during the year of sale because it offsets ordinary income taxes from the sale. For example, a person who would normally contribute $30,000 each year to nonprofits will make a significant dent in their taxes for many years by donating $300,000 in the first year.
At the same time, this former owner began to share his values with and provide lessons to younger generations by involving his family in the charitable giving process. Every December, he allows each grandchild to give $1,000 from his DAF to a charity of their choice. Through this strategy, they've been able to spend quality time with the grandkids, while leaving a legacy shaped by their ethics and love of family.
Don’t Spend Time and Energy on the Small Stuff
Some new retirees, now looking to fill their time, want to save a few dollars by doing their own taxes or managing their investments. They may initially see it as easy while also saving some money.
But to do it right, it isn’t easy. They’d need to keep up with the latest changes in tax law, an often tedious and time-consuming affair. After spending a few hours on this task, most see the value in continuing to have an accountant handle it.
The same is true for investing: Cutting corners to save a few bucks can have a massive impact on the longevity of their investment portfolio.
Determine How to Enjoy Retirement
After working 40 years or more, it often takes many business owners some time to shift from full-time work to retirement. A financial adviser can help them discover what the new chapter in their life will look like and spend their time (which often is their most limited resource, one they may value more than money) with the people and activities they love.
We recently encouraged a retiring dentist who sold his practice to also sell his large house and the building where his practice was located. Instead of spending time managing a large dwelling and a business property, he freed up time for his grandchildren, friends and improving his golf swing.
Having a plan for managing your wealth in retirement can help a new retiree accomplish many goals – both financial and non-financial. And it can provide an opportunity to show your family how your wealth can be used to help others. Instead of spending retirement worrying about the latest tax plans, use it instead to enjoy life – you’ve earned it.
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