A caller to Hanson McClain’s Money Matters is an entrepreneur who is sitting pretty, but he needs a plan to make his windfall last.
Ken: Hello, and thank you for taking my call.
Scott: Hi Ken.
Ken: I'm in a little bit of a different position than I've ever heard you guys talk about. I'm 60 years old, disabled, I sold my business, so I have nine-years worth of income coming. And I'm sitting on a sum of cash that part of me feels it should be invested and part of me feels it shouldn't be. What would you suggest?
Pat: Let's talk about it. So what did you sell your business for? How much money?
Ken: It was about $800,000.
Pat: Okay. And then you structured a note over nine years, is that correct?
Ken: For a part of it. Yes.
Pat: Okay. So how much of it...
Ken: And I paid off my house.
Pat: So how much are you going to receive from the note on a monthly basis?
Pat: Okay, and then how much money do you have in cash after paying off your house?
Ken: Probably $250,000.
Pat: And you already accounted for the taxes that you owe on this, I assume?
Ken: Yeah, it's all done.
Scott: Okay. The thing we look at, is that 9 years from now, that 5,000 a month stops.
Scott: What then, right?
Pat: Okay, and do you have any other assets, other than your home and this money and the monthly income?
Pat: Okay, and did you apply for Social Security Disability? Are you on Social Security Disability?
Ken: Yes. And that's in addition to the $5,000 a month.
Scott: Okay. Are you currently receiving that?
Ken: It's in mediation, but yes.
Pat: Okay, so it looks good. So between those two, you’ll receive about $7,000 a month. Does that sound about right?
Scott: And are you married Ken?
Pat: What did you earn from your job when you owed the company? What was your monthly income? Tax and income together...
Ken: Oh, I don't know because what I did was, I did it and poured it all back in, so that when I did sell it, it would be free and clear pretty much.
Pat: Got it. So do you think you could live comfortably on $7,000 a month?
Pat: Okay, well then that's the answer.
Scott: But the question is, what happens in nine years?
Pat: Correct, what we're trying to determine is when do you need this 250,000?
Ken: In nine years, if I'm alive.
Pat: Even if we assume you're not alive, we assume that your spouse will be alive.
Ken: That's correct.
Pat: So we're managing it for the household.
Scott: How long have you been receiving this $5,000 a month?
Ken: For a year.
Scott: Okay, and do you find that you're spending everything that's coming through the...
Ken: No. I could still save on top of...
Pat: How much?
Ken: Probably a couple thousand dollars.
Pat: All right. So here's the exercise that one needs to go through, Ken, is really saying, "Okay, how much can we budget today, so that nine years from now when this stops and we have to start taking an income from our savings, we can replace that income?" And furthermore, is to allow for some sort of inflation bump along the way. So does your spouse work outside of the home?
Pat: And will your spouse be receiving a pension?
Ken: But she has a business, she will be selling that off at some point probably.
Pat: Okay. What is your main concern?
Ken: Well, back in 2008, like everybody else I lost half of what I had invested. And so I'm not in a real eager mood to get real excited about taking this and putting it in something and possibly lose half of it. I'd rather be safe and gain less.
Pat: Got it. And how did you respond in 2008, did you just sell your investments and then go to cash or?
Ken: I did. And invested it into my business.
Scott: Got it.
Pat: So it's not an all or nothing thing right, Ken? So obviously at age 60, just selling a business, having some disability, taking your proceeds from the sale of your business and throwing it in the stock market would be foolish but...
Ken: Thank you.
Scott: No, I mean...
Pat: Yes, it would absolutely.
Scott: If you called up and said that you've put it all in the stock market, I was going to say, pulling our hair out, but I don't have much left.
Pat: But it wouldn't be that bad of an idea to treat this much like large pension funds, treat their assets and look at a timeframe and when you expect to take income from this and how much income you would expect to take. So I would put this in a tax efficient port...Actually, I would probably do something a little bit more advanced than that. I'd probably try to incorporate your wife's business into it. Does she have any employees?
Ken: Yes, she does.
Pat: Okay. I would try to possibly incorporate some benefits, tax benefits through your wife's business in this.
Scott: You would really benefit from sitting down with a CERTIFIED FINANCIAL PLANNER™, somebody who can help walk each step of this. And really what needs to...just thinking about this, as Pat says, it's really incorporated in what's happening with your spouse as well, but it's figuring out the right plan of how much of the $5,000 a month that's coming in from this sale can you spend and how much of that should really be set aside for the future, then what's the proper investment mix for the $250,000 that you have...
Pat: And the proper investment mix, if I was to give it right off the phone the little I know about you, would probably be a moderate portfolio or moderate to conservative portfolio.
Scott: Yes. So something where you've got a variety of different type of holdings where some would remain in cash, but you'd also have some different types of fixed income investments, some stock, but just a minority, by far a minority of the portfolio. Because remember, you've got nine years, but even at nine years, you'll start taking an income. So it really needs to last much longer than that. It's not an all or nothing situation.
Scott: But I think it's been a year now. It sounds like it's been sitting in cash. You know this isn't the right plan long term. So I think by making this phone call, it's definitely the right starting point. I think your next step is really sitting down with a CERTIFIED FINANCIAL PLANNER™...
Pat: And I'll give you an example, what we should probably be looking at, is to see if your wife, if she has a lot of employees maybe a 401K or SEP IRA is not appropriate but maybe a ROTH contribution into an IRA, using some of your wife's earned income is appropriate. And that way you're taking some of those dollars.
Ken: I put money in the ROTH?
Pat: If your wife's working.Ken: Yeah.
Scott: You may be able to, yeah. Like Pat was saying, it might be an opportunity to really fund...
Pat: What's called a self Uni-K or a self-employed 401K or SEP IRA, just depending upon what her business looks like, how many employees she has, what her income is.
Ken: Right. Okay. And one last...
Pat: But Ken, from the little I know about you right now, those are the questions I would ask. But at the end of the day, the question you asked us was, what is the appropriate mix? And I would think it was moderate to moderate conservative...
Scott: Which is for this. Yeah.