By Mark Bordelove
The dust has settled and now it’s time to hit the ground running.
What happens when your professional and personal lives collide in one year and big decisions need to be made all at once? Well, in 2020 many people had a confluence of decisions to make because of circumstances dealing with COVID-19 and other issues.
Derek is a local podiatrist, friend and client. He’s in his mid-40s, married, and has two children. He’s been affiliated with his firm for 17 years.
His partner decided, because of COVID, he was ready to retire. He had been leaning in that direction but the pandemic pushed him over the edge.
Derek needed to decide if he even wanted to buy the practice. He was not sure they could agree to terms and was exploring options. Once they agreed that business continuity was a concern, they got serious about negotiating terms.
One item that was very important to Derek was to make this transaction digestible from an initial outlay of capital. We advised him that he should consider structuring the “down payment” as a consulting fee. The amount of the “fee” would be 50 percent of the total sale price. By structuring the deal as a consulting fee it allowed Derek to deduct the expense from his taxes. The business was also able to deduct the payroll taxes that were incurred from the “fee” and this of course was a bonus for the business.
The rest of the sale price was to be completed through a loan obtained from a local bank. This presented an interesting challenge through COVID as the banks were not open while they were negotiating the buyout. It dragged the process out a bit because they could not meet with any bankers but rather had to deal with details over the phone.
Once the deal terms were in place, Derek needed to firm up his long-term savings plan. We had met several times to get a real firm idea of how his cash flow situation would look after the closing and how he can jump-start his savings.
His first objective is to ramp up his savings into his SEP plan. He’s considered to be self-employed so he can contribute up to $57,000 to the plan. He’s got a foundation started but it’s been hard because, as most doctors experience, student loans are a drag on the ability to start saving heavily early in your career. To attack the growth piece of his savings allocation we are planning to use various growth ETFs. Some examples of ETFs that seek to accomplish his goal are various technology, information technology, healthcare, small-cap, midcap, and/or dividend ETFs. All these vehicles can provide a solid starting point in creating the growth piece of a portfolio.
After he builds his core with the growth piece, we will add value, which has underperformed this year. A good starting point there would be one of the many value ETF’s that fit into the puzzle. From there we could add in an international ETF with a nice dividend yield.
The investments are one piece of the planning process. Derek and his wife need to address estate planning needs. They have assets, children, and a business. I made sure the family went through the data gathering process with a trusted colleague I partner with on these cases to aid and assist in the estate planning process.
The next issue they needed to address was what to do with the existing life insurance Derek had. This involved a few tough decisions. The first was to deal with insurability. Derek had experienced a few health issues over the last few years so we were concerned about insurability and being rated. He also felt he needed to maintain the death benefit because if something happened to him, he needed to make sure his wife and kids would be taken care of.
The cost of conversion is a sizable increase in the monthly premium. He went from $250/month to almost $1500/month. He battled with the fact that he felt those funds might be better utilized just investing in the market. I told him he needed to sleep well with his decision and he ultimately decided that maintaining the death benefit along with the cash option and availability of those funds was very important to him. He went through the health screening and thankfully was not rated. His premium was what it would have been if he had not experienced any issues. He ultimately went with the conversion and is very happy with his decision.
His income will nearly double so we discussed bumping the funds being allocated to the 529 accounts for the children. His daughter is in the 11th grade and she has enough for 2 years of college right now. The increase in monthly contribution should allow them to get close to having 4 years paid for. His son is in the 8th grade and has about a year and a half of college paid for. He should be covered by the time he’s ready to go.
We also discussed different options and things Derek should be considering for his staff. At the moment there are eight employees and Derek pays insurance for four. He would like to offer some type of retirement plan. The plan that would be right for them at this time would be a SIMPLE IRA. It is easy to set up and administer. The limit the employees could contribute would be $13,500, ($16,500 for those 50 and over). We work with several small businesses and have multiple plans of this structure. It really works out to be convenient, cost-effective and easy for all parties involved.
Derek has had a ton of upheaval in his life this past year like the rest of the world. Along with making sure his family is safe and healthy he transitioned his business to himself and is looking to jumpstart his personal investment program. I’m very confident with as motivated as he is personally and professionally he will have a ton of success in the future and I’m looking forward to watching him work towards his goals.
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. Dividend payments are not guaranteed and may be reduced or eliminated at any time.
ETFs trade like stocks, are subject to investment risk, fluctuate in market value, and may trade at prices above or below the ETF’s net asset value (NAV). Upon redemption, the value of fund shares may be worth more or less than their original cost. ETFs carry additional risks such as not being diversified, possible trading halts, and index tracking errors. Exchange-Traded Funds concentrating in specific industries are subject to higher risks and volatility than those that invest more broadly.
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