So You’re Ready to Sell Your Business – Now What?
If you own a business, then you know what kind of work it takes to start one. But at this point, the lean years may be over for you, and the business is now running or even growing on automatic pilot. But you are not going to be able to run the business forever, or even for the rest of your life, and you do not have a ready successor that could take over the business for you after you are done with it.

Therefore, the time has come for you to begin contemplating the eventual sale of your business. While this is the route that you expected to take, you are now unsure of what to do to make that actually happen. Valuation and taxes tend to be the first issues that must be dealt with. Valuations can be tricky assessments to make in today’s marketplace, as many general rules of valuation will not produce realistic numbers in a given industry. Frequently, the value that is initially placed on a business will differ substantially from the sum that is actually paid, or even offered by the buyer. Whether or not the business has a tangible income stream is an important factor to be considered during valuation. For example, a medical or other health practitioner with a large client base will obviously have a less regular income stream than a business-based business that has steady, annuitized income.

For a transaction of this nature, finding the right team of experts to partner with is also important. Many business sales will require the services of a CPA, business attorney and, in some cases, an actuary. The CPA’s primary job here is to value the sale price of the business’ assets or stock, as well as help you to reduce the capital gains tax on the sale. The business attorney will facilitate the negotiation of the business transfer, and will also review the contract between you and the buyer. Actuaries are generally required if your business has any kind of defined benefit plan that needs to be liquidated, converted, or transferred. A financial planner, and probably an insurance agent, would be good members to have on the team as well. The planner can act as coordinator between the other members of the team, while the insurance agent could serve to implement a buy-sell agreement, if necessary.

If you want to know more about what will be involved in selling your business, call us. We can analyze your situation and help you determine an appropriate exit strategy for your business. Visit our web site for more information.

Entering Retirement? What’s Your Investment Horizon?
Those entering retirement often misperceive the length of their investment horizon. Just how long does your portfolio need to last, you ask? Well, that all depends on how long you will probably live. But that is where the misconception is! How long will you statistically live?

We all know that life expectancy¹ is somewhere around 77. But what does that really mean?

Life expectancy is based on a birth year. The life expectancy² for people born in the year 1900 – the turn of the 20th century - was about 50. That means 50% of the people born in 1900 were expected to live beyond 50, while 50% were expected to have died before reaching it. So life expectancy is statistically the ‘50/50’ age that people will live to.

The life expectancy³ for a person born in the year 2000 - the turn of the 21st century – is 77. So 50% of these people will live beyond the year 2077. We can see that life expectancy has increased by about 50% during the 20th century. Improved medical care and health account for most of this.

Now here is the rub.

First, these life expectancy values are an average of everyone born in a certain year. Life expectancy has a finer grain variation based on a person’s sex and socioeconomic status. For people born in the year 2000, women’s life expectancy is 79.9 while men’s is only 74. Well-off white collar workers will statistically live longer than poorer blue collar workers. How you are able to control your living style and health clearly has an effect on your life expectancy. So you are not destined to kick the bucket at the 75-year mark!

Second – and more amazing – is that the older you get, the further beyond your original life expectancy you are expected to live! That is because you have survived early death statistics that restricted your original life expectancy, based on your birth year.

Insurance statisticians keep track of this extended life expectancy for persons based on their current age. The IRS publishes its own tables on these.⁴ It’s called ‘the life expectancy factor’ which is the number of years more you have to live – statistically. You have a 50% chance of outliving these too! See the table for examples taken from the IRS’ table.

All this comes down to the statistical fact that retirees have generally a much longer investment horizon than they think. When you plan out - or re-evaluate - your retirement years, be sure to prepare your living style, portfolio, and withdrawal rates to keep your portfolio robust so it will be there as long as you will -s statistically!

Of course, each of us is different, and your health situation may make a significant difference.

Give us a call or fill in the reply coupon so we can help position your portfolio for projections consistent with your investment horizon.

¹ Centers for Disease Control and Prevention – information at http://www.cdc.gov/nchs/fastats/lifexpec.htm.
² Ibid.
³ Ibid.
⁴ Single Life Expectancy Factor in IRS publication 590, Appendix C.

Strategies for the Spousal Beneficiary of an IRA
If your spouse dies with you assigned as sole beneficiary of his IRA, then you have a few options on how to take distributions from it. Which one you should choose will depend on circumstances such as your age and earnings. Let’s see ...

IRS rules⁵ allow you either to roll over your deceased spouse’s IRA that designates you as beneficiary into you own IRA (i.e. you become the owner of his IRA) or to be treated as a spousal beneficiary of your husband’s IRA – keeping it in his name. The option you choose determines when you must begin your Minimum Required Distributions (MRDs).

If you choose to be the owner, you can wait until the year after you turn 70½ to begin your MRDs. Choosing to remain a spousal beneficiary requires you to begin your MRDs the year after your deceased spouse would have turned 70½. You, of course, can begin distributions earlier subject to the ‘before age 59½’ penalty for early withdrawals. What circumstances might influence your choice?

Spouse’s age is within a few years of deceased husband’s age

Suppose your husband died at age 67 and you are 65, and you both already began your retirement. Choosing to be ‘owner’ or ‘beneficiary’ does not make much of a difference since either you are already pulling money out of your IRAs, or you intend to in a few years. You may just roll his into your own IRA to reduce the number of IRAs you have for easier management of them.

Stay-at-home spouse much younger than deceased husband

If you, on the other hand, were 57 and relying on him for income, you may want immediate access to distributions from his IRA. If you took them as owner, you would be penalized for distributions before turning 59½. But if you remain a spousal beneficiary of his IRA, you can begin distributions for his IRA right away without penalty.

Working spouse much younger than deceased husband

But what if you, again, are only 57 but still working and making good money?

In that case you may not want to remain a spousal beneficiary. This would trigger MRD requirements in only three or four years based on your deceased husband’s age. Those distributions, added to your working income, would be highly taxed.

In this case, you would be better off taking ownership of his IRA and then waiting until you retire (when your income drops) before taking distributions. You just may want to wait until you reach 70½ to conserve as much of it as possible for later needs.

Give us a call or fill out the reply coupon so we can help you with your IRA decisions and funding concerns.

⁵ IRS Publication 950 contains all rules mentioned above.

Avoid Paying Penalties on Your Early Withdrawals
Millions of Americans that save money in their IRAs or qualified plans have no intention of withdrawing that money until after they reach age 59½. Unfortunately, there are times when circumstances dictate that this is absolutely necessary. Any number of misfortunes such as medical expenses from an uninsured accident, or an extended period of unemployment, can leave all other sources of liquid assets depleted.

Of course, your retirement assets are probably the last source of assets that you want to draw on in the event of a financial hardship – but at times you may have no choice. At all costs you would like to avoid the 10% early withdrawal penalty inherent in any kind of premature distribution. However, the IRS has allowed for several exceptions to this rule over time, although the rules for traditional and Roth IRAs versus qualified plans differ somewhat. These exceptions can be broken down as follows:

Traditional IRA:

• Death
• Total and permanent disability
• 72(t) distribution (a series of substantially equal and periodic payments)
• IRS levy of the pla
• Medical expenses
• Qualified higher education expenses
• First-time homebuyer expenses up to $10,000
• Health insurance premiums for the unemployed

Roth IRA:

• The same exceptions as for the Traditional IRA (first-time homebuyers can pull out $10,000 in profits penalty free and tax-free if the money has been in the Roth IRA for at least five tax years)

Qualified Plans

• All of the exceptions that apply to Traditional IRAs
• Separation from service from your employer at age 55 or later
• Distributions made to your ex-spouse due to a qualified domestic relations order (QDRO)
• Dividend distributions from employee stock ownership plans (ESOPs)

The IRS has allowed these exceptions as both a means of relief and encouragement. The relief comes for the dead, divorced and disabled, while those who are trying to better themselves through education or trying to purchase a home can receive encouragement in the form of penalty-free distributions. Of course, these exceptions fall into a different category than other more common penalty-free transactions, such as rollovers or transfers between accounts or plans.

If you are currently strapped for funds and would like to know if you are eligible to take a penalty-free distribution from your IRA or qualified plan, call us. We can review your situation and show you how to minimize or eliminate the penalties from your retirement plan withdrawals.

Social Security Income and International Agreements
Getting ready to collect your Social Security Benefits? If you spent part of your working life outside of the U.S., you may have more benefits than you think.

The U.S. has concluded Social Security agreements⁶ with a number of other countries that help you avoid double taxation if you are still working abroad – but also to help protect your Social Security Income Benefits. That is because your work overseas may help you to qualify for U.S. benefits if that work was covered under a foreign Social Security system.

One of the main purposes of the international agreements is to help people who have worked in both the United States and another country, but who have not worked long enough in one country or the other to qualify for Social Security benefits. Under an international agreement, the U.S. Social Security System will count your work credits in the other country if this will help you qualify for your U.S. benefits. However, if you already have enough credit under U.S. Social Security to qualify for a benefit, they will not count your credits in the other country.

If they do have to count your foreign work credits, you will receive a partial U.S. benefit that is related to the length of time you worked under U.S. Social Security. Although they may count your work credits in the other country, your credits are not actually transferred from that country to the United States. They remain on your record in the other country. It is therefore possible for you to qualify for a separate benefit payment from both countries.

The table lists the countries which the U.S. has Social Security agreements with and shows the effective date of each. Be sure you get credit for foreign-based work you have done in the past.

Give us a call or fill out the reply coupon so we can help you find out if you qualify for more Social Security benefits for work you have done abroad.

⁶ http://www.socialsecurity.gov/retire2/international.htm.

Basics on Bond Yield and Interest Rate Risk for Retirees
Many investors accept the basic observation that fixed income securities assure income for retirees more so than equities. The basis of fixed income securities are often bonds which are IOUs of corporations, municipalities, and the federal government. Understanding how the market affects the interest rates of bonds and the income they generate can improve your investment strategy.

Bonds are fixed term – 5, 10, 20, 30 years – debts that pay bondholders for the use of their money. Corporations typically issue them at a face value (often called par value) of $1,000. At maturity – when the bond terms ends – they will retire the bond while paying bondholders the face value. Callable bonds can be retired early at the discretion of the Corporation on certain call dates.

Bonds carry a coupon rate which states how much the corporation will pay the bondholder yearly. This amount remains fixed during the bond’s term. The coupon yield is this yearly amount divided by the face value of the bond. At the bond’s issuance, it reflects the market’s current rate of interest for bonds of such a term and by such an entity (i.e. the corporation’s bond rating).

Once issued, bonds can be traded on the open (secondary) market based on current interest rates. Since the annual coupon payment is fixed, if current interest rates increase above the coupon yield, then the price bid for the bond must decrease and vice versa. This represents interest rate risk – often called market risk.

As a simplified hypothetical example, a bond issued at a coupon yield of 5% and face value of $1,000 will have an annual coupon payment of $50. If current interest rates rise to 6%, then that $50 payment must represent 6% of the market price of the bond – a decrease to $833.33 – so that bond’s current yield would be 6%. If you bought the bond at $1,000 and you had to sell it, you would have a loss of $166.67 under current interest rates.

Likewise a current interest rate drop to 4% would require $50 to be 4% of the bond’s market price – which would then rise to $1,250. And that would be a 25% gain over the issue price. So we see that bond prices can fluctuate. Being forced to sell them under increased interest rates than when you bought them will produce a loss of your investment – i.e. your purchase price. (The market will determine the actual market price of the bond based on other factors – such as changes in credit quality, perceptions of risk, and yield to maturity not considered in the above hypothetical illustration).

Since bonds mature or may be retired early (i.e. called) you can project a total return you can get by holding a bond from date of purchase until either event occurs. These projections give the yield to maturity (YTM) and yield to call (YTC). They are calculated by adding up all the coupon payments you will receive (and assume you reinvest these for interest) taking into account your purchase price and the eventual face value you will be paid, and the time between purchase and maturity (or call date).

So you can see the interest rate risk that can plague or benefit you when holding bonds. You can reduce this risk by buying bonds with shorter maturities, as they fluctuate less. However, shorter maturity bonds generally pay less income. Balancing these two factors-fluctuation and income, may be helped by professional advice.

Give us a call or fill out the reply coupon so we can help you decide what bonds are suitable in your situation.

Study Shows Long-term Care – Though Needed – Is Often Too Costly for Seniors
Paying for long-term care (LTC) poses a serious dilemma for seniors according to a recent study⁷ by Boston College’s Center for Retirement Research. Who needs LTC, what is the cost, who is supposed to pay for it, and who can afford it were issues addressed. Let’s see some of the findings and what seniors can do.

Table 1 shows that three out of four 65 year olds (in 2005) were projected to need LTC in their future showing the imminent importance of LTC planning.

Directly paying for long-term care is expensive⁸ with average assisted-living facilities costing $30,000 to $40,000. Home health costs are in the $16-$20/hour range, and private nursing homes costs begin at around $70,000 per year. Such costs can wipe out a person’s savings and legacy.

Table 2, overall funding sources for LTC as of 2005, shows that 18% of dollars spent come from direct out-of-pocket payments by individuals. Medicaid pays most but only for those who have almost no assets, have spent down what assets they had, or had earlier divested themselves of their assets.

Only 7% of the dollars spent were paid through private insurance. LTC insurance is costly. Annual premiums are nearly $2,000 per person at age 65. And the expected LTC insurance dollar benefit for each premium paid is only $0.56 for men and $1.04 for women.

The study concluded that 91% of Americans cannot afford to pay for LTC insurance. It also concluded that many Americans mistakenly think government will pick up much of the LTC for everyone. This confusion and competing expenses prevents Americans from purchasing LTC insurance long before 65 when it costs much less. Lastly, long-term care insurance will remain a costly dilemma until government provides universal long-term insurance, or enough Americans purchase LTC insurance to spread the risk and lower premiums.

For now, seniors may try to see if they qualify for LTC insurance to see if it remains an option. They should arrange for transferring their assets long before needing LTC to qualify for Medicaid. Lastly, they can look for LTC with other insurance combos that make paying premiums more palatable.

Give us a call or fill out the reply coupon so we can help you determine if buying long term care insurance or finding other options are suitable for you.

⁸ MetLife Mature Market Institute, “The MetLife Market Survey of Nursing Home & Home Care Costs,” September 2006. MetLife Mature Market Institute, “The MetLife Survey of Assisted Living Costs,” October 2006.

Dropping Your Long-Term Care Policy Could Be a Mistake?
As you make your way through retirement in fairly good health, you may consider the wisdom of maintaining your long-term care policy, especially if your savings are running low. Will you really need the policy?

It is understandable why you would want to drop a long-term care policy that you do not think you will use, but before doing so, there are a few things you may want to consider.

You are healthy now – but that could change. If you live alone and away from family, you may need a home health aide, and that typically costs more than insurance premiums: For in-home assistance, the national average cost is $25.32 per hour, or $26,333 per year for just 20 hours of assistance a week.⁹

Medicaid may not help you. Medicaid could cover some of your long-term-care costs, should you need it; but it has some drawbacks. For example, few Medicaid programs pay for assisted living or home health care, which many people prefer to nursing homes. And to qualify, you generally must use up all but a few thousand dollars in your savings.

It will be hard to change your mind. If you drop your policy and later change your mind, you may have to pay more for a new policy that is comparable.

A better option may be a reverse mortgage, which lets homeowners who are 62 or older borrow against their home equity. You could use the proceeds to keep paying your insurance premiums, or to create a nest egg to pay for home health care. A couple of caveats, however: First, the closing costs on reverse mortgages can be expensive. And second, if there is a chance you might move to an assisted living facility (as opposed to staying in your own home), you may want to stay with long-term care insurance – because if you live away from home for 12 months in a row, you have to repay the reverse mortgage, which probably means selling your house.

How much you can borrow using a reserve mortgage depends on your age and prevailing interest rates. We can send you a brochure about the cost of long-term care – and help you calculate how much you could obtain from a reserve mortgage. Contact us now.

⁹ Source: Genworth Financial 2006 Cost of Care Survey, as of March 2006 (http://longtermcare.genworth.com/overview/what_is_ltc.jsp).