World Class Mergers & Acquisitions  |  For Companies $5 Million to $100 Million in Revenue

Annuities May Help Sellers Close the Gap in Funding Their Retirement

I am indebted to Michael Dreyer, Financial Representative with Northwestern Mutual for contributing the following article on the advantages and benefits of annuities.

Many business owners have had plans for years to sell their business and use the proceeds to fund their retirement.  However with the decrease in values in today’s market, sellers are either postponing the sale or are accepting a lower price and feel they are compromising their lifestyle in retirement.

Possible solution.  A study by the University of Pennsylvania’s Wharton Financial Institutions Center found you could create lifetime income by buying an immediate annuity for 25% to 40% less money than it would take to generate the same income from a diversified portfolio using the 4% withdrawal rule.

The 4% withdrawal rule is a widely accepted rule of thumb which suggests that if you hold your withdrawal to 4% of your nest egg during the first year of retirement and increase the dollar amount by 3% in each of the following years to keep up with inflation, you won’t run out of money over a 30 year retirement, (with the drop in the markets this rule is being questioned).

How an annuity can help. Assume the seller wanted $1,000,000 for the business, using the 4% withdrawal rule they would withdrawal $40,000+ a year in retirement.  Now their business is only worth $750,000, the 4% withdrawal is $30,000+, a loss of $10,000 annually.

However, an annuity could increase their annual income, while guaranteeing they won’t outlive their money.  Suppose the seller is a male, age 65, with the business that has shrunk in value to $750,000.  If he were to take $300,000 and purchase an immediate annuity he would receive about $22,500 (assuming single life payout with payments ceasing at annuitant’s death) a year in payouts, for life.  The balance, $450,000, could be invested in a diversified portfolio and a withdrawal of 4% would produce another $18,000 per year.  His retirement income would total about $40,500 annually.  This puts him in the same income position as if he had sold the business for $1,000,000. The combination of the annuity and the $450,000 diversified portfolio allows him to continue to participate in the upside potential of the markets with considerably less volatility then if his entire nest egg were in the market.

This strategy is certainly not for everyone but does provide a means for the seller to accomplish their original income objective. If you or any of your clients would like to discuss this further please don’t hesitate to contact me, I would welcome the opportunity to work together.

If you know of a business owner who’s thinking of selling or buying a business and who might benefit from a free, confidential, consultation with us, have them contact me at mertel@legacyadvisorsgroup.com.

By: Mike Ertel, Transworld M&A Advisors