Call asks, “What is the ideal place for anticipated $4 million payout for sale of small civil engineering firm?"

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Scott: Steve in Irvine. Steve, you're with Hanson McClain.

Steve: Gentlemen, hi. How are you guys?

Scott: Fantastic. Thanks for joining us.

Steve: Good. My question is this. I run a small civil engineering business. The potential is there for someone to come in and grab me and pay some cash. I'm 57 years old. I may just want to take whatever money that is and go play golf for the rest of my life. We're a small firm. We have some pretty good clients. Our plan is...we think we have a pretty good shot. We have some fairly good clients that I think would be attractive to a larger firm. I think we could get snapped up.

I have the dream that after taxes I'm going to walk away with, let's say, $4 million. What is the best vehicle for me to leave that in one place, have it pay me every month tax-free, and be able to go enjoy the rest of my life with my kids and take vacations and all that kind of stuff?

Pat: Tell us a little bit about your investment history. Have you invested? I assume you probably have a company 401(k) or SEP or something along those lines.

Steve: Yeah.

Pat: How has your portfolio been invested over the years?

Steve: It's pretty much the 401(k) with the mutual fund idea and all that kind of stuff.

Pat: Has it been primarily equities or a balanced portfolio of 50/50?

Steve: Balanced, usually pretty balanced. In the past, very aggressive, and I've kind of dialed it back as we get older. I do have a Roth that I'm just not able to contribute to from what I understand, because I make too much money.

Pat: Is your home paid for or not?

Steve: It is not.

Pat: Do you plan on staying in Irvine, or do you plan on moving somewhere?

Steve: I do. We love Irvine, and we'd love to stay here.

Pat: Okay. Probably the first thing I would do is pay off the home.

Steve: Okay.

Pat: The reason being is that money not going out is the same as money coming in.

Scott: One can make an argument for paying off your home, and one can make an argument for not. During this last downturn, I don't know anybody who was foreclosed upon that didn't have a mortgage.

Pat: The reason we like the homes to be paid off is we find actually people...it changes their risk tolerance a little bit.

Scott: How big is your mortgage?

Steve: It's three grand a month.

Scott: How much do you owe on it?

Steve: Oh, 520, something like that.

Scott: Generate $3000 a month, I mean, you'd need close to, on a real conservative side, 800,000 sitting in an account in this market without taking on a lot of risk, unless you want to take on risk.

Steve: After taxes, right.

Pat: I think I would probably go with a balanced portfolio. I think that I...

Scott: There are a couple...Yeah. There's not one vehicle. There are a few ways to look at this. You could say, "I'm going to take a portion of this and make sure it's in a 100% guarantee investments," such as "I'm going to take a portion and put it in U.S. Treasuries" or a portion maybe even buy an immediate annuity from an insurance company for some portion to give you kind of a private pension, so to speak. You could go along that line. You could just say, "I'm just going to have a real balanced portfolio knowing that my portfolio is going to go up and down. There are going to be some years it's going to do much better than the income I'm taking, and some years it's going to do less than the income I'm taking." Figure out a realistic withdrawal. How much are you expecting to pull out of $4 million a year? What would be your kind of income?

Steve: What I'd love to do is leave it alone, just let it sit there and stay $4 million, and I live off whatever interest I can make from it.

Scott: Yeah. What we would like is to see that continue to grow and you live off some interest so that 20 years from now, when a loaf of bread is $10 instead of $5, it's not an issue. Of course, I think with 4 million, it's not bread that's going to be the issue. It'll be bigger expenses like "Can we afford to take that trip?" and that sort of thing.

Steve: Yeah, that sort of thing. The reason I'm calling is I heard somebody say, "Hey, tax-free municipal bonds" and they were talking about something else. I go, "Okay. I don't know anything about that."

Scott: That might make sense for a portion.

Pat: It would make sense for a portion, absolutely. If you were sitting in our office, we would recommend a portion of it in tax-free municipal.

Scott: Maybe 20% or something.

Pat: In tax-free munis.

Scott: But see, they have their own risks as well. For example, municipal bonds are essentially loans to municipalities.

Steve: Right.

Scott: If you buy a municipal bond, you're loaning money. You want to buy a California bond? You're loaning money to California.

Steve: Right.

Scott: You want to buy a bond in Irvine? You're loaning money. Municipalities carries some of their own risks. I think the key, Steve, is building a portfolio similar to how large pensions and endowments and foundations manage their money.

Pat: Then, stress testing the portfolio so that you know what to expect out of it.

Steve: Right.

Pat: Part of our process at Hanson McClain is to stress test portfolios. What the stress test portfolio, it's not 100% accurate because you don't know until after the fact, but it's predictive of what a particular portfolio will do in certain market conditions. As much as investment advisors love to talk about the upside of the portfolio, we love to talk about the downside. The reason is of the $2 billion plus we manage and the 4000 clients, and I've been doing this for over 20 years, I have never received a single phone call when the markets are up telling me to slow down. I'm making too much money for my clients. Never once.

Scott: Never.

Steve: Right, of course.

Pat: Never. "What happened? The statement, man, it's huge!" What you want to do is to look at the downside. At the end of the day, the portfolio that is the right one for you is the one you're going to keep through good and bad. That is the right portfolio.

Scott: And at this stage in your life, your greatest concern is not getting rich but it's about not becoming poor, correct?

Pat: With that, I would actually err on the more conservative side. Actually, you should do some introspection about how you reacted to the markets the last time around through the great recession.

Scott: I don't think his portfolio should be that much different than, say, CalPERS, the public employee retirement system in the state.

Pat: Largest one in the country. I don't think it should be...

Scott: Or other endowments.

Pat: You should treat it like a pension fund.

Scott: And highly diversified, because you never know. Unless you predicted that oil was going to go from 100 and some odd to 30 bucks a barrel. If you predicted that, forget diversification and follow your gut.

Steve: Yeah.

Pat: Actually, if you predicted that you should get your own radio show.

Steve: Yeah. I'm working on it. I'm talking to your producer now.

Scott: All right, yeah. Hopefully they'll pay you a little more than we get paid for doing this show.

Pat: Appreciate the call, Steve.

Scott: Yeah, thanks, Steve.

Steve: All right. Thanks a lot, fellas.

Scott: Congrats on the retirement.

Pat: For the rest of our listeners, go to our website and look at the Hanson McClain portfolio stress test. It is on our website.

Scott: Money manage stress test, yeah.

Pat: You can actually stress test your portfolio yourself.