About to retire and at an almost total loss.

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ghsebldr
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About to retire and at an almost total loss.

Post by ghsebldr » Thu May 24, 2018 12:35 am

Hi folks
Last edited by ghsebldr on Mon May 28, 2018 9:30 pm, edited 3 times in total.

123
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Re: About to retire and at an almost total loss.

Post by 123 » Thu May 24, 2018 12:51 am

It sounds like you have significant positions in individual dividend-paying stocks. The problem is that you likely lack diversification and if one of your concentrated positions has business difficulties (even General Electric has had a rough time lately) you may be at considerable risk. I would stop reinvestment in the dividend paying stocks so those positions do not grow larger and explore mutual fund investments. Even the Vanguard Total Stock Market Index Fund returns a dividend of about 1.8% recently in addition to its growth potential.

While the 3 individual stocks you mention have dividend yields of 5% - 6% they are mature companies. By investing in a Total Stock Market Index you get a chance to participate in the growth of the new generations of companies on an ongoing basis.
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Tamarind
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Re: About to retire and at an almost total loss.

Post by Tamarind » Thu May 24, 2018 6:46 am

Just doing a little math to help others weigh in.

AA: 100/0, with massive tilt toward dividends

Assets:
$198k in 3 individual dividend stocks
$60k taxable brokerage
$35k Roth IRA
$40k SEP IRA
$45k Checking account

Home value $330k

EF ~2x annual expenses

Income streams:
Business income stream $12k-$24k annually
SS $15,600 annually at age 67, not yet started
$33k annually - Wife's pension (not available to OP due to separate finances)

Debt:
$145k mortgage at 3.125%


Thoughts:

OP, your nest egg can probably yield about $16,000 per year with relatively low risk if you diversify it. With your income from the business, that adds up to at least $30k in annual income until you take SS, then $43k after. I'm taking the low estimate for how much your business can return to you for safety's sake. If your expenses are less than that, then you're in good shape.

If your expenses are higher than that, reply and let us know about how much your annual expenses are and what the biggest contributors are.

I'm a little concerned that about 1/3 of your retirement income is dependent on your business remaining a going concern for the rest of your life. Any chance you could direct the company to buy an annuity (SPIA) for you instead of returning free cash flow to you monthly?

If you can stretch your nest egg out longer, or get a little more out of the business for a few years, the highest return on investment you'll get is by waiting to claim SS: 8% per year. Only you know what your family and personal health history is and whether that makes sense.

In the very long term, especially if your wife does not have huge savings, you may have to sell the house to fund medical care for either or both of you. Although you keep separate finances, it will be even more important in retirement to be transparent with one another about your financial situations.

I strongly recommend that you diversify into broad index mutual funds for stocks and also add some bonds. You are currently at extreme risk of losing 1/3 of your income if AT&T has a bad year. It is not unheard of for dividend kings to drop sharply and cut their dividends at the same time.

Now that your taxable income has dropped is a good time to take your losses if you have any in your individual stock positions, plus gains at least to the amount of the losses, plus gains to the edge of your current tax bracket (I guess this would depend on if you file jointly or separately with your wife). Those dividends may feel like reliable income, but they are also a reliable tax bill. You can still get the return but at much more friendly tax rates if you make your holdings more efficient.

minesweep
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Re: About to retire and at an almost total loss.

Post by minesweep » Thu May 24, 2018 10:14 am

While you are getting an attractive dividend yield on those 3 stocks their share prices are down double digit percentages from their 52-week highs.

T –23%
PPL -31%
F -15%

Jack FFR1846
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Re: About to retire and at an almost total loss.

Post by Jack FFR1846 » Thu May 24, 2018 10:24 am

My thoughts.......

Once retired and firmly in a lower tax bracket, sell off the stocks and invest in diversified mutual funds.

Can you sell the business? My fear would be that income from the business dwindles and you have to choose between letting it go downhill or becoming un-retired to go fix it. If you sell, it's someone else's problem.
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smitcat
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Re: About to retire and at an almost total loss.

Post by smitcat » Thu May 24, 2018 10:29 am

Jack FFR1846 wrote:
Thu May 24, 2018 10:24 am
My thoughts.......

Once retired and firmly in a lower tax bracket, sell off the stocks and invest in diversified mutual funds.

Can you sell the business? My fear would be that income from the business dwindles and you have to choose between letting it go downhill or becoming un-retired to go fix it. If you sell, it's someone else's problem.
I think this post is very good and a key to retiring - I have seen these situations where the business struggles and then the owner puts money back in that they cannot really afford in retirement.

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ruralavalon
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Re: About to retire and at an almost total loss.

Post by ruralavalon » Thu May 24, 2018 10:54 am

It's good to see that you are debt free, other than the mortgage note.

ghsebldr wrote:
Thu May 24, 2018 12:35 am
Hi folks,I have been browsing this site and MMM for several years now and was pretty sure what I was doing to save for retirement was right for me but as the time gets closer I get less confident.
I have a small manufacturing business that I think will always be able to pay it's own way as far as labor and inputs go and should be able to return at least 1 to 2 thousand per month to me personally for the foreseeable future (as in the next 20 years at least)

I'm already 64 and have been self employed for the last 33 years in different service and manufacturing businesses, the current one 12 years. My SS will be only $1300 a month as a result of being in marginal businesses in the past. I guess my question is am I a fool for having invested in almost all dividend paying stocks over the last decade? Currently have a little over 4k shares of T 1500 shares of PPL and 2500 shares of F. In the beginning the plan was easy buy, buy, buy. Currently I can count on about a thousand a month in dividends which just get reinvested. These are in my self directed brokerage account at Capital investing. I also have my emergency fund at Capital online savings. It amounts to about 20 months of my personal expenses.

I do also have a roth at Capital with only about 35k and a Sep ira at TD Ameritrade with only about 40k all in SPY. I also have an account at Vanguard with about 60k in it with 55% in vbiax @.07 cost 20% in Vdigx @.20 cost 15% in vwusx with .43 cost and 10% in vwelx at .25 cost.
My cash on hand at local CU's is around 45k I use that as a slush fund for large purchases of materials for the business but it is always paid back within a month or two. My discount for buying a whole truckload of steel is huge compared to ordering just in time.

We have a 15 year mortgage of $145k with about 7 years left on it @3.125% No other debt at all. Tax rate was I think 25% two years ago with just over $175 k income but went back down this year with all of the labor and new Vehicle purchase that I took 100% deduction on this year. Taxable income was only 34k in 2017. Anticipate the same going forward. I plan to let my manager run the business in it's entirety from now on.

6500 Roth going forward each year and probably only about 5k into Sep Ira. Holding off on social security until 67 or so. No other pension except 33k a year for wife from post office, we save invest and handle our money separately and have a joint account for Mortgage and household bills.

So is it time to move out of dividend paying stock and get into indexes or does this rundown look reasonable to you? I kind of expect a beat down here after having read these forums for years and still trying to do my retirement on my own.
Forgot, assets not including home lower mid six figures. Home is around 330k

Thank you for taking the time to read this. I will answer any and every question posed.
It's fairly common to worry as you get near to retirement, to wonder if your protections and assumptions are accurate, and to think about what last minute changes might be necessary.

It looks to me like Tamarind's summary is accurate, except that the $45k checking is a capital reserve for operating the business. Is that summary otherwise correct?

What is your estimate for annual living expenses in retirement?

When do you plan on retiring?

What is the form of the business (sole proprietorship, partnership, corporation, LLC, etc.)?

What do you expect your tax bracket to be for 2018 and thereafter until retirement?

What is your tax filing status?

Please simply add this to your original post using the edit button (the pencil icon near the upper right corner of your post), it helps a lot if all of your information is in one place.

I agree with the suggestion to stop new purchases and stop reinvestment of dividends in the 3 dividend stocks, and instead start purchasing a very diversified stock index fund like Vanguard Total Stock Market Index Fund.
"Everything should be as simple as it is, but not simpler." - Albert Einstein | Wiki article link:Getting Started

delamer
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Re: About to retire and at an almost total loss.

Post by delamer » Thu May 24, 2018 11:18 am

You may save and invest your money separately from your wife, but you need to be familiar with her income and assets (and vice versa).

For instance, is there a survivor benefit for her $33K pension? In other words, if you survive her, does the pension stop or do you get all or some of the pension. Does she get any Social Security? Does she have any savings?

Presumably neither of you is going to let the other become homeless if s/he hits a difficult financial time so you both need to understand your joint resources.

Also, consider revising your post in this requested format to make it easier for people to give you suggestions: viewtopic.php?f=1&t=6212

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David Jay
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Re: About to retire and at an almost total loss.

Post by David Jay » Thu May 24, 2018 11:56 am

I would immediately stop reinvesting dividends in the (3) stocks and reinvest that money into Vanguard Total Stock Market. You can purchase it as an ETF in your brokerage account: VTI

That step is low cost and will have low tax. Someone else mentioned that those 3 stocks are well off their recent highs. Do you have some lots that are losses? If so, you can tax loss harvest - sell the lots that have losses and sell an equivalent amount of gains. This frees up cash without taxes. Then invest that in VTI as well.

Diversification is the one true "free lunch" in investing. Single Company risk can be eliminated at essentially no cost (4 basis points).
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celia
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Re: About to retire and at an almost total loss.

Post by celia » Thu May 24, 2018 12:38 pm

We don't intend to be nosy, but if you are married, you need to share your wife's assets and income and expenses too. For example, is she eligible for SS and how much? If she was to be eligible for the max which is about $38,000 a year if starting at Full Retirement Age (FRA), then you could collect half of her SS instead of yours. If she can wait until age 70 to start her benefit, that would be great for the survivor who will be able to collect the higher SS when one of you dies.

Does she have other income streams that you both will live on? Does she have any retirement accounts she has contributed to such as 401Ks, IRAs, or 457 plans?

We understand if one or both of you were married to someone else before and that person(s) part of the estate goes to their relatives instead of completely to the spouse. But while you are both living, you need to take care of yourselves first. This does not mean you have to split joint expenses exactly in half (unless you previously agreed to that in writing). What does your wife think about your joint retirement finances? This part may need to be addressed as much as the numbers themselves.

It all boils down to your expenses in retirement. As long as your income and assets (at a 3-4% annual spend-down rate) are more than your expenses, you will be fine. The easy way to determine if you are there is to actually live for a year or two (while you are both still working) on what you expect your retirement expenses will be. Put every other dollar into savings. You can make an adjustment for taxes if they will be higher or lower in retirement than they are now, but need to include taxes as an expense. And you should save some of your assets for a large medical emergency (that medical insurance does not cover).

And I agree with someone above who suggested you sell the business. You shouldn't count on that as stable income since the company will change when you are not there. The worse case is that you become disabled soon after you retire and your personal expenses start to vary at the same time the business becomes unpredictable. That will make you more financially unsure than you are now. Not a good retirement!

PDX_Traveler
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Re: About to retire and at an almost total loss.

Post by PDX_Traveler » Thu May 24, 2018 1:26 pm

Jack FFR1846 wrote:
Thu May 24, 2018 10:24 am
My thoughts.......

Once retired and firmly in a lower tax bracket, sell off the stocks and invest in diversified mutual funds.

Can you sell the business? My fear would be that income from the business dwindles and you have to choose between letting it go downhill or becoming un-retired to go fix it. If you sell, it's someone else's problem.
Why wait to sell of the individual stocks? Isn't the cap gains consideration largely independent of the tax bracket?

krow36
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Re: About to retire and at an almost total loss.

Post by krow36 » Thu May 24, 2018 2:12 pm

PDX_Traveler wrote:
Thu May 24, 2018 1:26 pm
Jack FFR1846 wrote:
Thu May 24, 2018 10:24 am
My thoughts.......

Once retired and firmly in a lower tax bracket, sell off the stocks and invest in diversified mutual funds.

Can you sell the business? My fear would be that income from the business dwindles and you have to choose between letting it go downhill or becoming un-retired to go fix it. If you sell, it's someone else's problem.
Why wait to sell of the individual stocks? Isn't the cap gains consideration largely independent of the tax bracket?
If taxable income plus long-term capital gains are under about 77k, the cap gains are taxed at 0%. If they are over about 77k, the cap gains are taxed at 15%. This applies to qualified dividends and cap gain distributions also.
https://www.fool.com/taxes/2017/12/22/y ... -2018.aspx

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KlingKlang
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Re: About to retire and at an almost total loss.

Post by KlingKlang » Thu May 24, 2018 2:46 pm

Lots of good questions and advice so far. A question of my own concerning your expectations that the business will continue to generate cash flow for the foreseeable future: How dependent is your business on you being the person running it? How many hours a week do you spend managing it? Are you the functional head of sales and marketing? I have personal experience with two businesses where the owner retired and they literally never got another order and were closed within a year.

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Re: About to retire and at an almost total loss.

Post by pkcrafter » Thu May 24, 2018 5:36 pm

KlingKlang wrote:
Thu May 24, 2018 2:46 pm
Lots of good questions and advice so far. A question of my own concerning your expectations that the business will continue to generate cash flow for the foreseeable future: How dependent is your business on you being the person running it? How many hours a week do you spend managing it? Are you the functional head of sales and marketing? I have personal experience with two businesses where the owner retired and they literally never got another order and were closed within a year.
I think this is a legitimate concern.
should be able to return at least 1 to 2 thousand per month to me personally for the foreseeable future (as in the next 20 years at least)
20 years is not in the foreseeable future. If you aren't going to on be the job every day then you might consider selling the business.
Anticipate the same going forward. I plan to let my manager run the business in it's entirety from now on.
This might prove to be a very risky decision.

Paul
Last edited by pkcrafter on Thu May 24, 2018 9:45 pm, edited 1 time in total.
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Nate79
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Re: About to retire and at an almost total loss.

Post by Nate79 » Thu May 24, 2018 8:38 pm

So Ford, PPL (some utility company I hadn't heard of), and AT&T?
That is extreme portfolio risk. And a major part of income stream dependent on someone to manage your business for you.

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Re: About to retire and at an almost total loss.

Post by Grt2bOutdoors » Thu May 24, 2018 8:56 pm

Nate79 wrote:
Thu May 24, 2018 8:38 pm
So Ford, PPL (some utility company I hadn't heard of), and AT&T?
That is extreme portfolio risk. And a major part of income stream dependent on someone to manage your business for you.
PPL - Pennsylvania Power and Light also owns Louisville Gas and Electric (Kentucky, Tennesse and Virginia) and a large UK utility business. Its a well known utility. They aren't going out of business, I'd be more concerned about sustainability of dividend at the other two companies. But that said, agree with others, the OP has significant risk relying on just 3 companies to bring in 1/3 of potential retirement monies. Any one of those omitting the dividend will cause two things to happen, the share price will plummet and your cash flow will dry up with no timetable as to when or if it will recover.

I read the PPL earnings release where it says "the dividend is secure", in fact they raised the dividend 4% this year, perhaps it is secure, this quarter or for the next two years or maybe the next 30 years, but what it doesn't say is "how long its secure for". The last company that talked about the dividend being safe, that was GE, go look at what GE did shortly right after that statement was made - the dividend was halved, the stock price has plummeted and now they are slowly selling off their crown jewels while holding on to the businesses no one wants. :oops:
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