Shrink Your Balance Sheet to Grow Your Retirement Portfolio

Entrepreneurs looking to grow their business and save for retirement need a creative strategy to balance debt and savings. Adviser Mark Bordelove describes one client's journey through this balancing act.
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By Mark Bordelove

Small business owners are the engine of growth in the United States. They are hardworking, entrepreneurial people. They lay it all on the line to create, manage, and run their businesses to, hopefully, make a living and create a legacy.

Often, people that fit this personality profile lack balance in terms of separating the “go for it” mentality and planning for their future. It is always pedal-to-the-metal and. With one of my clients, this is putting his future at risk.

He is 55 years old and has spent 26 years building a successful automotive consulting practice. He recently hired a young associate who will hopefully buy the business within the next 10 years or so. Over the last several years he has invested heavily in technology to make his business more efficient, but this slows the rate at which he can pay back debt.

Barry is a smart, responsive friend and client who is married with two kids. His wife owns her own business but was hurt financially during the pandemic. He has made all the right decisions financially to this point. He has responsibly saved for college and put money away monthly into various tax-deferred vehicles for himself and his wife. His biggest assets are his 401(k) and IRAs.

He has also purchased annuities and used them primarily as tax-deferred savings vehicles. He has funded whole life insurance products that have significant cash value at this point, as well.

Barry, like any entrepreneur, is looking to grow his business and was approached about doing some commentary in the local media about the auto industry. He caught the media bug and was asked about doing a radio show but he had to either buy time or find a sponsor. Before he knew it, he owed the media outlet north of $150,000.

Barry was at a crossroad. He could give up this effort to grow and develop his media brand and pay off his debt, which he would be able to do rather quickly, or roll up his sleeves and go for it.

This is when he reached out and we discussed his options.

The first thing we discussed was finding debt that would benefit him in some capacity. He was 7 years into a 15-year mortgage and had not refinanced. He refinanced a new 15-year loan and pulled out $50,000 of equity. This is an example of “good debt,” meaning it is tax-deductible. So, he took advantage of this resource.

The next resource he took tapped was obtaining a loan through the small business association. Again, an example of good debt – the interest is deductible as a business expense.

He asked me about putting some of the expense on his credit cards. We quickly dismissed that option as credit card debt is not considered a business expense and therefore would not be deductible. This would be an example of “bad debt.”

Keep in mind that as he is going through his options, he is incurring more expense as he continues to do his weekly radio show. Debt is being paid down but not as fast as it may appear.

The next bucket that he looked to tap was the cash value in the life insurance policies. Barry has paid into the policies for over 10 years, so he has a significant cash balance built up. Once he utilizes this bucket of money and makes a withdrawal, the money he pulls out will be taxable to the extent it exceeds his basis. The rate of interest credited in cash has obviously been low, so this is the next most tax-efficient bucket of money to access.

The next tranche of assets available to him is his taxable brokerage accounts. This was a concern because he has sizeable capital gains in most of his holdings except for some fixed-income instruments. We targeted these fixed assets and it generated a good amount of capital for him with very minimal tax consequence.

We are trying to stay away from the 401(k) and other retirement assets as those will incur a 10% early withdrawal penalty if he accesses them before age 59 ½. In addition to the early withdrawal penalty, those assets would become taxable upon disbursement. These combined factors make this bucket of money prohibitive to access.

Barry is grateful that he had the foundation in place to access these funds. It is an example of discipline and planning coming to fruition. His wife is not so happy that he has gone all in, but she understands his passion and commitment. If he is not able to secure a sponsor soon, though, he will have to give up the dream so as not to completely wipe out all the savings.

The exposure he has received from his radio presence along with the advances in productivity from the investments in technology have provided the business the infrastructure to grow and advance into the next phase for him. The business might not be where he imagined but because of his commitment to planning, he is on solid footing as he marches toward a happy, healthy retirement.

About the author: Mark Bordelove

Mark Bordelove became a licensed financial advisor in 2000 and co-founded Bordelove Foster Wealth Management in 2009. A devoted husband and father, Mark has also completed two Ironman competitions.

Mark Bordelove is a Financial Advisor with, and securities and advisory services offered through LPL Financial, a registered investment adviser, member FINRA/SIPC. This is a hypothetical situation based on real-life examples. Names and circumstances have been changed. The opinions voiced in this material are for general information only and are not intended to provide specific advice or recommendations for any individual.

Consult an adviser prior to investing. No strategy assures success or protects against loss. Investing involves risk including loss of principal. 

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