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July 18, 2014

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Yikes. I was gonna close my business and take a part time W-2'd job when I retire so I could work less, reduce risk and earn steady retirement income ;-)

Sounds more like work than retirment.

I am trying to take a hobby I really like to do and make it into a income producing venture and it has been alot of work. For right now I am taking the summer off and will get back to it in September.

Buying a business may be a good retirement strategy for some, but building a successful business is the best and fastest way to get to retirement.

Though if you have never owned a business before, buying one in retirement sounds risky. Running a business is a whole lot harder than saving and investing an amount over time to buy one.

@FMF - this doesn't seem like a very good idea for you unless it is part of a semi-retirement. If you so hands on that you are calling your property manager every week, then I would imagine the business would definitely be a part time job.

Erik --

Just to set the record straight, I don't call my property manager every week. I email him. :)

I think a lot of it depends on the type of business and what your current knowledgebase is. We see quite a few retirees around here think it's a great idea to buy a business, but end up losing their shirts because they have no idea how to run a coffee shop/restaurant/boutique/etc and just think it would be a blast to do as part of their retirement.
We've considered buying different types of businesses that have good multiples and look as though they can be offloaded almost entirely to a solid manager without any work on our part (the previous examples are virtually never businesses like that and are far more like buying a job), but it's still a fairly risky endeavor.

FMF-- I believer retirement income should be passive, simple, tax efficient, consistent and safe.

Passive because retirement, by definition, is typically an end to active work.

Simple because as you age you may lose some mental capacity.

Tax efficient so that you keep more of your $

Consistent so that you are better able to rely on it to pay the bills and your expenses, and

Safe-- well, this one speaks for itself.


If you can find the right business, then I think it's a great idea. Most businesses takes a lot of time, though. Even the best employee needs some help. It's hard to trust someone to run your business as well as you. I would worry about leakage issue too if someone runs my whole business.

We have now been retired for 21.5 years (age 58-79). Retirement can be the most carefree and enjoyable time in your life if you are relatively free of health problems. From 1992 until 2010 we travelled all over the world and had a fabulous time building up great memories that last a lifetime. We don't own any income property or any businesses and wouldn't have it any other way. The only work I do these days is taking care of our large garden.

What we do have is a passive annual income of $400,000, that grows each year. The income comes from two pensions, two social security checks, CDs, corporate bonds, municipal bonds, and two bond funds. The reason for having two bond funds is that it's easy to sell some shares when you need to raise some cash for IRA distributions and any unanticipated expenses. We don't need anything like $400K these days but money makes money and if you manage it well it just keeps growing on its own.

About the only work entailed in managing it is reinvesting the distributions you get twice/year from bonds and CDs and also from any that mature. I am in a private access group at Fidelity but seldom have any need to contact them. You don't have to be a rocket scientist (which I used to be) to pick new bonds. I pick California muni bonds to avoid state tax, and scan Fidelity's offerings on my computer to find ones with the best combination of yield & rating I can get. I don't need to pay any attention to maturity date since I'm only interested in income.

Our youngest daughter has $3M of muni bonds that I manage for her. She had a $2M divorce settlement from her attorney husband, and I am grooming her to take care of our family investments after I can no longer do it. She was a Math & Business major but her ex husband never wanted her to work.

@FMF, my initial thought is that everyone who buys a business does so with the intention of succeeding. The 6%-10% return? It can actually go in the other direction, as well. Small businesses are usually dependent upon people, and that wild card can turn things on a dime and usually in the wrong direction. A $10/hr employee can make a 4-figure mistake, or incur a 5-figure lawsuit. Paying a premium for an existing turnkey, or a franchise license, is also sunk and will come out of that profit. I'm sure you have considered all this.

If you can get a risk-free return of 3% in a 10yr CD, then your actual return for the effort and risk is 3%-7%. Just my two cents...

A coworker's parents bought a bar in the university's nightlife area. They also got it as part of their retirement. Within a few months, they wanted to unload it. I don't know what the details are, but it was a lot more work and employee drama than what they were expecting. You should really know what you're getting into(which FMF understands as demonstrated by the rentals). If you want to own a business, work at a similar business for a few years before buying one. Kitchen Nightmares(UK version) features people who bought their dream restaurant but couldn't profit because they knew nothing about running a restaurant. Since profits were nonexistent, the owners were there 7 days a week, 12 hours a day. Some retirement.

@Old Limey, may I ask which California muni bonds do you have? Thanks.

@Nguyen
I own 3,835 municipal bonds of which about 60% were issued by various Californian agencies such as airports, hospitals, unversities, cities etc. My average yield to maturity is 4.936% and the most typical rating is AA.
The minimum number of bonds that you can purchase is 5, with a par value of $1000 each. Bonds are similar to stocks to the extent that they can trade above or below the par value, however when they mature the price you receive is par value. When you buy a bond in the secondary market you will also have to pay the seller the amount of interest that has accrued since the last interest payment was made.

Yes, buying a business would be a good retirement income strategy but make sure you really know your business. Investing would be risky if you don't have enough a solid background for it.

This is a very interesting discussion to me. It seems to me that the case for taking on the risk of owning a business in retirement compared to building a portfolio like Old Limey's would need a compelling reason to be pursued.

If Old Limey and others who own bonds, particularly munis, are still reading, I'm curious as to what those who have structured successful bond portfolios believe the minimum income level is where beginning to build a bond portfolio makes any sense.

I am under 40, but have considered investing in muni bonds as a small portion of our portfolio (<10%) to get "practice" learning about the bond market for a long-term move that may be 20+ years out.

Any thoughts? If this feels like a hijacking of the original topic, maybe FMF could tee this up as a separate discussion?

Really enjoying the comments from everyone here.

Only if whatever the business does is what you consider fun and you are certain that the minimal cash flow will exceed you minimum expected return on capital should this even be considered. Remember that sellers know their business better than anyone else so, without some information not in the public square which makes the business more valuable in the future, the buyer is at a disadvantage in the transaction and must pay more than the seller perceives to be the true value.

PJ
The largest overall return you will get from buying municipal bonds will average out a little under 5%/annum. While the return is free of Federal income taxes, only bonds issued by the state in which you reside will be free of state income tax.

Under 40 is really far too young to put money into bonds. At that age you need to be fully invested in stocks, or mutual funds that own primarily stocks. Reason being that you probably don't have nearly enough invested to insure that your retirement will be happy and secure throughout your old age. At 40 your future is largely unknown. At that age we had 3 children, had been married for 18 years, had owned our home for 11 years and I was in what turned out to be my final job and starting to move up the ladder at work.

You have to stay in the fast lane and subject yourself to the volatility of the market if you are striving to get the much larger returns that you need. I didn't move into the slow lane until our portfolio was worth well over $5M. What convinced me to get into the slow lane was that the stress of suffering through really bad days in the market was getting to me and I figured "Why put yourself through a lot of stress just to leave a lot more money to your children"?

I know that most people believe in Buy & Hold but that strategy will kill you if you have to suffer through a deep recession. You just cannot afford to have losing years if you want to become a successful investor.

@ Old Limey, Thank you so much for taking the time to explain. I have learned a great deal from FMF, you, and other commenters. Surviving through a couple of bear/down markets, I am leaning toward index ETF funds, and learning more about bonds. I look at a couple of Vanguard California muni bonds, and may I ask if that would be a good entry? I will be 50 in a couple of years. Thanks again.

Nguyen
Muni bonds are issued by particular state agencies. They are offered by most brokerages and all of the large mutual fund companies that offer a wide variety of bonds and funds. You would buy them through the company where you hold your other investments if they are a full service broker.

You can also sell any bonds that you own through the company that you deal with. The only problem is that after you place your sell order they will see if any of their bond dealers are willing to buy them. If there are no takers then you have to resubmit your sell order every day until hopefully it finally sells.

Buying bonds is a lot simpler. You scan your company's bond inventory and select the ones that best suits your needs, then place your orders. If you need help doing this you should talk to a representative at your company and they will help steer you through the process. I bought some California muni bonds in my daughter's account this morning, they were 20 California State general obligation bonds, 10 El Camino Hospital bonds, and 5 Sacramento Airport bonds.

I am actually doing this as we speak. I found a solid multi-unit franchise with a "manager the manger" model (I will not run any of the stores but will oversee the managers of each location.) Fortunately for my wife and I, they had territory available in the area we wanted to retire in. They have an extremely low SBA failure rate and have not closed any outlets in the last three years.
I will work for the next 5-7 years while we get our units up and running but plan to leave full time employment when they are all in the black.
We do have a safety net (a military retirement annuity) which made this an easier choice for us. We anticipate the business will eventually run us about 20 hours a week of work once they are up and running with the ability to take time away with little notice.

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