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North Bay Business Journal

Monday, May 19, 2014, 6:00 am

Wealth management for baby boomers entering new phase

Planning continues with more in retirement

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    Business and financial advisers are pointing to the swelling ranks of baby boomers currently in retirement as an accelerating trend impacting the world of wealth management, seeing growing demand for ongoing guidance from an aging population that largely views that transition in the context of the recent recession.

    Loren Kertz, Richard Stone, Jim Petray. David Waitrovich

    Among the issues emerging as defining that cohort of retirees is unease over the rapid market fluctuations that have become commonplace in recent years, bolstered further by fresh memories of a recent economic downturn that still reverberates throughout the national economy. And for the newly retired former business owners who guided their companies through that tumultuous period, adjusting to the relatively hands-off nature of retirement income can be a particularly trying process, those advisers said.

    “Everybody has emotional issues with investing money,” said Loren Kertz, senior financial consultant at the Corte Madera branch of Charles Schwab. “The hard part for these business owners is checking out for a little bit of time and letting the investments work.”

    Shaken from recession

    It was in September of 2008 that news of the unfolding mortgage and financial crisis contributed to a widespread market decline that included the largest-ever 778-point slide in the highly watched Dow Industrial Average in a single day. It was considered a pivotal moment in an ongoing economic downturn that impact countless investors, including many baby boomers on the cusp of retirement.

    Yet many have noted that those who remained in the market have largely been rewarded — that same index, which hit 6,594 in March of 2009, broke a record 15,000 in May of 2013 and has spent the majority of 2014 above 16,000.

    While that uptick has provided a recent example of the longer-term gains for most investors, it is still the day-to-day oscillations that pull hardest on the heartstrings of former business owners, Mr. Kertz said.

    “The Internet is a big piece of that. In the past 15 years, you have a daily, up-to-the-minute balance change,” he said.

    ‘Bulge’ retiring amid low interest rates

    Many advisers described an uptick in the time and resources they have devoted to helping former business owners come to terms with that new source of income, and emphasized that the millions of baby boomers entering retirement is no small phenomenon in the world of financial planning. The oldest of that large generation, defined by the U.S. Census Bureau as the nearly 80 million people born between 1946 and 1964, turned 65 in 2011.

    “It’s very simple – a lot of them are getting older at the same time,” said Richard Stone, founder and chairman at San Rafael-based wealth management and advising firm Private Ocean. “We’ve always done succession planning for business. But the volume and velocity is increasing.”

    Prudent investors among that “bulge” of Americans are collectively facing distinctly challenging economics: that the current low interest environment stands to negatively impact the yield of bonds and other lower-risk investments that traditionally make up a larger proportion of an individual’s portfolio into retirement, Mr. Stone said. It is a situation that stands to reward careful and ongoing portfolio management, particularly as interest rates start to rise, he said.

    Connection lingers for former owners

    Mr. Stone and others also noted that larger companies seeking growth in an improving economy are increasingly looking to acquire smaller firms, meaning many entrepreneurial baby boomers are facing a greater opportunities for a third-party sale. Yet those situations come with their own continuing concerns, as financial success for the former owner frequently hinges on the ongoing survival of the business.

    “In many cases, you end up bringing back some paper,” said Mr. Stone, advising some kind of back-up plan for risk surrounding those agreements for payment sometimes issued to owners in a business sale. “What if the new owners fail? Where it gets even worse if that new owner is family.”

    The situation is one example of the ongoing financial stake that some former owners and their heirs maintain with the business — interests that advisers said frequently overlap with emotional ties.

    To that end, defining the role that a former owner might maintain in retirement carries a two-fold benefit — preserving a rewarding connection to professional life for that individual, and helping to support a business that, in some cases, is now an ongoing source of wealth in the hands of the next generation, said Jim Petray, partner in the private company services group in the North Bay offices of Burr Pilger Mayer (BPM), accountants and consultants.

    “That role can be very gratifying,” said Mr. Petray, describing positions such as ongoing consulting and board appointments. “Having mom and or dad still around to council, but not interfere, is a good thing. It can be a win-win, but it should be carefully considered.”

    Failing to define that role can create tension for the new generation of owners at a time when they are adjusting to a newly independent role, potentially impacting the future health of the business and family relationships, he said.

    “Frankly, it’s something that should be discussed beforehand,” he said.

    Managing tax for retirement income

    Passing wealth to that next generation also comes with its own nuances for retiree investors, advisers said.

    While a historically large gift and estate tax exemption has allowed many married couples to pass on estates around $10 million tax-free, high-net-worth individuals with very large retirement accounts could find themselves and their heirs paying a hefty income tax bill in the mandated annual distributions following 70-and-a-half years of age, said Mr. Kertz of Charles Schwab. Those mandated distributions, calculated as a percentage of account balance based on life expectancy, can bump the retiree or heir into a large tax bracket and take a larger bite out of income.

    “Find a good distribution stream over time,” he cautioned.

    Yet even with a carefully planned transition of wealth and business ownership, as well as management of assets in retirement, advisers agreed that family relationships were often the lynchpin in the ultimate success of a retirement plan and the ongoing survival of the family business.

    “When a family (business) goes bankrupt, very rarely is it because the stock market went down,” said David Waitrovich, managing director of the Waitrovich Group at Merrill Lynch in San Francisco.

     

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