income

Replacing Business Income

By Rocco A. Carriero, MBA, CRPC®, APMA®

So you’ve decided to sell your business. No more long hours away from the family or brief vacations. No more worrying about employees, suppliers or customers. No more filing quarterly taxes, meticulous record keeping, or meeting payroll. And no more salary. What?

Meeting income and liquidity needs after the sale of a business can be particularly challenging in today’s low-interest rate environment. While fixed-income products tend to be among the most reliable of investments, lower yields tend to prod investors into taking more risk (not necessarily a wise strategy for retirees no longer in the workforce).

Before deciding how to allocate your capital, a good first step is to assess exactly where your available capital is. Ideally, the money that you have earmarked to help provide a retirement income stream came from the sale of your business. Therefore, the next challenge is to determine the most ideal way to get that capital working for you.

Consider that $10,000 invested at 4% would generate about $33.33 in monthly income. Investing that same amount in a more aggressive instrument, such as a bond, dividend-paying stock, Certificate of Deposit (CD), or other high-yield savings vehicle will earn a bit more while taking on a relative amount of risk.

The first step in creating an asset-allocation model is to evaluate your personal goals. Each individual investor portfolio is based on unique factors such as goals, lifestyle, risk tolerance, stage of life, health/marital status, investment horizon, and financial situation. This can be a complex exercise and many find that meeting with a financial professional can help. When an asset allocation strategy is being discussed, consider the following income-replacement guidelines:

  1. Choose uncorrelated asset classes, each of which act differently during similar market conditions.
  2. Diversify,e.: choose value, growth, large-cap, small-cap, mid-cap, international, fixed income securities, and real estate-based assets. Spreading investments over a variety of asset classes gives a better chance of achieving more stable, long-term returns.
  3. Evaluate the professional with whom you are investing. Make sure you understand the proposed plan and how it may help to meet your objectives. Keep in mind, there is risk is each investment but spreading investments across various classes can reduce risk.

 Consider Disability and Long-Term Care Coverage

What would happen if you became disabled—a much more likely event than most realize. Consider an individual disability policy. Group long-term disability benefits offered through employers typically guarantee 50-60% of salary replacement, are usually taxable, and begin when sick leave and short-term disability benefits end. Individual policy benefits can be paid directly to you and are generally income-tax free. Also, individual policies are usually portable and typically do not automatically terminate with a job change.

As long term care promises to be an increasingly expensive item on people’s retirement agendas, consider a way to save for retirement while planning for the probability of long-term care.

While no one can be sure for how long their retirement will last, an income-for-life plan can provide the best long-term use of the funds generated by the sale of your business.

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