YFP Co-Founder & Director of Financial Planning, Tim Baker, CFP®, RLP® is joined by YFP Planning Lead Planners, Kelly Reddy-Heffner, CFP®, CSLP®, CDFA®, and Robert Lopez, CFP®, to discuss selling a pharmacy and leaving a legacy before transitioning into retirement.
About Today’s Guests
Kelly Reddy-Heffner, CFP®, CSLP®, CDFA®
Kelly Reddy-Heffner, CFP®, CSLP®, CDFA® is a Lead Planner at YFP Planning. She enjoys time with her husband and two sons, riding her bike, running, and keeping after her pup ‘Fred Rogers.’ Kelly loves to cheer on her favorite team, plan travel, and ironically loves great food but does not enjoy cooking at all. She volunteers in her community as part of the Chambersburg Rotary. Kelly believes that there are no quick fixes to financial confidence, and no guarantees on investment returns, but there is value in seeking trusted advice to get where you want to go. Kelly’s mission is to help clients go confidently toward their happy place.
Robert Lopez, CFP®
Robert Lopez, CFP®, is a Lead Planner at YFP Planning. Along with his team members, he helps YFP Planning clients on their financial journey to live their best lives. To go along with his CFP® designation, Robert has a B.S. in Finance and an M.S. in Family Financial Planning. Prior to his career in financial planning, Robert worked as an Explosive Ordnance Disposal Technician in the United States Air Force. Although no longer on active duty, he still participates as a member of the Air Force Reserves. When not working, Robert enjoys being outdoors, playing co-ed volleyball and kickball, catching a game of ultimate frisbee, or hiking with his wife Shirley, young son Spencer, and their dogs, Meeko and Willow.
Episode Summary
In this week’s episode, YFP Co-Founder & Director of Financial Planning, Tim Baker, CFP®, RLP® is joined by YFP Planning Lead Planners, Kelly Reddy-Heffner, CFP®, CSLP®, CDFA®, and Robert Lopez, CFP®, to discuss YFP Planning Case Study #4. In this case study, Tim, Kelly, and Robert delve into the financial details of a fictitious family, the Patels. Aman Patel is a 59-year-old independent pharmacy owner looking to sell his pharmacy to his daughter, Jessie. Jessie currently works on staff at the pharmacy. Amin’s wife, Hannah, is a teacher with questions about her retirement pension and social security claiming strategies. Amin and Hannah also own a rental property they are looking to sell and want to know how best to use the proceeds of that sale as they are approaching retirement. Together, Tim, Kelly, and Robert cover the details of the Patels’ retirement timeline. They dive deep into how the Patel family will need to coordinate with a CPA and an attorney to best structure the succession plan for the pharmacy with considerations for both Jessie, who has student debt, and themselves as pre-retirees. Lastly, they explain planning options for the Patel family’s investments and insurance policies as they approach their transition to retirement.
Links Mentioned in Today’s Episode
- YFP Planning: Financial Planning for Pharmacists
- Schedule a free Discovery Call with YFP Planning
- Case Study #4 Summary Sheet
- Your Financial Pharmacist Disclaimer and Disclosures
Episode Transcript
[INTRO]
[00:00:00] TB: You’re listening to the Your Financial Pharmacist podcast, a show all about inspiring you, the pharmacy professional, on your path towards achieving financial freedom. Hi, I’m Tim Baker, and today I chat with YFP Planning’s lead planners, Kelly Reddy-Heffner and Robert Lopez, to walk through our fourth case study of a fictitious family, the Patels.
Aman Patel is 59 and is an independent pharmacy owner, who was looking to sell his pharmacy to his daughter, Jesse, who currently works on staff at the pharmacy. We discuss the Patels’ retirement timeline and how they’ll need to coordinate with an attorney and CPA to best structure the succession plan to Jessie. Aman’s wife, Hannah, is 55 and works as a teacher. At retirement, she’ll receive a pension and has questions of how to claim it, along with how to claim Social Security.
We also discuss questions about what they should do with their rental property and how they should handle the proceeds, whether they should pay down debt or invest. Finally, we discuss their investments and insurance policies, as they approach this very important transition.
[EPISODE]
[00:00:57] TB: What’s up, everyone? Welcome to our fourth case study in our series. Glad to be back with you. We’re going to today go through the Patels. The Patels are going to be a little bit of a different case. So in the past, we’ve through a couple in their 30s, a couple in their 40s, a couple in their 60s. Now, we’re actually going to talk about Aman Patel and Hannah Patel, who are a couple in their 50s, who were actually a pharmacy owner. So I’m glad to welcome back Kelly and Robert to go through this case study. Guys, what’s going on?
[00:01:25] KRH: Doing well.
[00:01:25] RL: Just staying cool out here in Phoenix.
[00:01:29] TB: Awesome. So let’s jump into our guy. So like I said, we’re going to be talking about the Patels and what they’re looking at as they approach retirement. So, Robert, why don’t you set us up, like we’ve done in previous cases, and kind of go through their overall demographic, what they’re looking at, where they live? Kelly, you’re going to get into goals and debt. Then I’ll kind of take us home with the rest of the balance sheet.
[00:01:50] RL: Yeah. So let’s jump right in. So we have Aman and Hannah Patel. So Aman is a pharmacy owner. He’s 59 years old. The salary he’s pulling out of the business is $150,000 a year. Obviously, as a pharmacy owner, he has no other income. That’s kind of his main source. His wife is a teacher. She’s 55. She makes $75,000 a year. Then she has some tutoring and support on the side, where she makes an additional $10,000 a year. They file their taxes jointly, and they are joining the pharmacy by their daughter, Jesse, who is a 29-year-old single pharmacist, who works through the pharmacy as well.
They are residents of St. Paul, Minnesota. Their income numbers break down to a gross of $235,000, which breaks down to 19,005 monthly and roughly $9,500 net, beating after taxes, contributions, and insurance. So those expenses break down to roughly like a 40-20-40 fixed expenses, variable expenses, and savings. They’re living in a three-bedroom single-family home that they purchased back in 2005, when the prices were good, and it was a 30-year-mortgage at 5.75%. They were able to refinance in 2012, down to 3.5%, and they have about $155,000 left on that mortgage.
[00:03:04] KRH: All right. In terms of goals, they both want to retire in the next several years. Aman would like to sell the pharmacy to daughter, Jesse, and help her with that transition. Hannah will receive a teacher’s pension. So that is about $2,500 per month. But she doesn’t quite know how to claim that, how it works. Then also, knowing what their Social Security benefit might be as well is important.
They are interested in no longer having a rental income property and would like to sell that, along with the pharmacy. But they are interested in staying in the St. Paul area. They have questions about paying off their debt, as they’re looking for that financial independence and retirement. Aman wants to golf more regularly and take those trips abroad, and Hannah wants to be more involved with charitable endeavors. They both want to help Jessie as much as possible, both as a new pharmacy owner, and she has some student loan debt as well.
So the debt in question that we’ll be looking at is that there is still the home equity line of credit that looks like a balance of about 10,000. They’re paying aggressively on that, and it does have the interest rate of the 5%, as Robert mentioned. There is a car note of about 15,000. That has an interest rate of 4%. They’re paying 250 per month on that. Then they do have that mortgage payment for their primary residence, just under $1,400 for that and about 10 years remaining.
[00:04:41] TB: From a wealth-building perspective and, again, kind of bouncing back and forth between the net worth statement, they have about $50,000 in cash in the checking account and then another $75,000 in a high-yield savings account. They have a variety of investment accounts, Roth IRAs for both of them, 403(b) for Hannah, the SEP IRA that Aman has through the pharmacy, and then a taxable account that they’ve been contributing to.
For the 403(b), Hannah has that, in addition to her pension. She puts about 10% in, which is about $15,000. She’s invested in balanced funds. Aman’s SEP IRA that he puts money into, he tries to target about $1,000 a month or $12,000 a year. He’s more conservative with his allocation. The Roth IRAs they’ve had in recent years contributed to, but they’ve stopped because they’re over the threshold for married filing jointly. Right now, they’re directing all those funds to their joint taxable accounts. So it’s about $1,400 a month or nearly $70,000 a year. Again, in terms of the allocation for the Roth IRAs, bounce more for Hannah, conservative more for Aman. Basically, the taxable account is going to be used to supplement their retirement.
On the real estate perspective, they do have their primary home that they’ve purchased, and it’s worth about 395,000, with about 155,000 left on the mortgage. They have a rental property, which was their first home that they didn’t sell. Once they purchased the most recent one, that’s worth about 275,000 with no mortgage. Then Aman had did a recent evaluation on the pharmacy, and he thinks that the pharmacy is worth about 750,000. So that’s basically the balance sheet.
From a wealth protection perspective, Aman has a $1.5 million term policy, life insurance policy that will expire at age 70. Hannah has one quarter of a million dollars that will expire at age 66. Aman has no short-term or long-term disability. Hannah has what she has through an employer, which basically covers 60% short term, 60% long term. Professional liability, Aman has his own policy. Then there’s the documents that definitely need to be dusted off, need to be updated and reviewed, especially with kind of the sale of the business upcoming. So they’re going to have to engage in attorneys for the sale and as the attorney to kind of get that rolling.
From a tax perspective, Aman has an account he’s used for the last 10 years. Then they’re just concerned about how the taxes are going to be treated related to sell on the business. So they have to kind of navigate that. So miscellaneous things kind of makes additional income, as Kelly said, with school activities, and she might continue to do that post retirement. Cash flow and staffing issues are top issues during the transition. So I’m just making sure that the [inaudible 00:07:25] have the adequate staffing to make sure that Jesse is not killing herself initially.
They have questions about, when do they – What’s the timing on the rental property? What do they do with the proceeds? Do they invest that? They’re kind of leaning towards more paying off the debt. Then Jesse wants to expand services at the pharmacy to increase lines of revenue. But Aman is less sure. So you kind of have that change management that they’re going to have to negotiate in terms of like who is the boss and when and what that looks like.
So a lot of stuff going here, guys. Kelly, I’ll start with you. What would be some of the things that jump off the page for you in terms of what we need to tackle with regard to the financial plan?
[00:08:08] KRH: I mean, I guess the top priority would be the sale of the pharmacy, since it relates to funds they’d have available for retirement, also helping to take care of Jesse in the process as well. This certainly would speak to needing an attorney to be involved in some tax planning as well. But I guess one of the things to think through would be like how much – Jesse has student loans. Her resources might not be robust to do an outright sale, if the value of the pharmacy is $750,000. So sometimes, those family sales can be structured over time, deciding if there’s an interest rate or as part of it a gift. It would all be things that would be important to think about.
It may be that smaller increments would be helpful for the family, in terms of planning as well, just to keep that tax liability for Aman and Hannah a little bit more manageable from year to year. So I guess that’s where I would start is getting some professional input to see what their options are, what an interest rate might look like, and how Jesse might be able to facilitate payment. That might also touch on the question of who’s making decisions. If it’s a partial buyout, if – I think those are always important things. Like the non-dollar and cents is just some of those logistics about how decisions will be made, who is going to be the board of directors, how to transition out. If you still have kind of a foot in the door, what does that mean in terms of your input and say?
[00:09:47] TB: Yeah. This is definitely one of those instances where as the CFP, I think you’re trying to quarterback in bringing different professionals because, obviously, from a legal perspective, from a tax perspective, an attorney, a CPA are going to have insight in terms of how to best structure this, and then kind of herd the cats along with a financial plan to see, okay, how does this all fit together?
But, yeah, timing of like the sale. Is it a complete sale? Is it something that invests over time? How does the tax work in terms of capital gains on the sale of that? How do you structure a promissory note? Is there money down? Is Jesse taking less of a salary and doing more sweat equity? Or is she kind of being paid as an independent pharmacist would at a market rate? So those are all things I think that like those would be questions that bringing in other professionals to help kind of navigate that.
Rob, I don’t know your take, but I think like three to five years, I think the time is now to start those conversations because I think it’s going to – Especially with an asset like this, it’s going to take longer than they think. So outside of kind of bringing in some of the professionals to start asking and answering some of these questions, what else would you want to know more about, whether it’s goals or what that looks like, with regard to their planning in kind of this transition that’s coming up?
[00:11:10] RL: Yeah. How much does he really want to work after that, right? So he’s 59 right now. Is he saying, “We’re going to stop working at 62 or 65.”? Is this a, “I want to have this transition started in three to five years.”? If he’s going to continue to work, especially helping her out, right? If she’s taking on the purchase of the business, she’s going to have to decrease expenses, and she may do that. Decrease that sweat equity, right? But she’s going to need help from a staffing perspective.
So if he’s going to be working there into the future, then, yeah, the time is now to get that transition started. So that way, she can slowly take over, while he’s still accruing an income and then working on transitioning that business. I think a real perspective on not only when they want to sell the pharmacy but when he wants to fully retire will set that timeline from a payout perspective is what we are working with the lawyers and the accountants to decide what the timetable or the time horizon is for that buyout. That’ll factor in pretty strongly.
[00:12:07] TB: Yeah. I think like it could be one of those things, where if you’re doing some part-time staffing at a pharmacy that your daughter’s drawn in that you kind of built that, that might be a little bit more enjoyable in the later years of your career, where you’re not having to worry about payroll, or you’re not having to worry about management and things like that. Obviously, you’re mentoring your daughter. But maybe it just kind of takes a lot of the stress off of you, and it can extend your career.
The thing that I would have bouncing around in my head is, okay, how can we structure this if it’s a seller finance and note that we can get paid enough to kind of get to that age 70, where Social Security – The strategy might be to delay that. Take money from the retirement accounts, delay Social Security, and then use that structured note as a way to kind of bridge that period. So I think those are the discussions in terms of like how long is that note going to be? What’s the interest rate to, Kelly, your point? If it’s not a market interest rate that that has to be considered a gift that we have to kind of track and make sure that we’re accounted for.
So these are all things. I think it goes back to the goals, right? So like when do you see yourself getting out? Is that something where it’s a clean break? There’s a note in here about Jesse kind of wants to – She wants to expand services. Is Aman going to be on board with that, if he’s still majority owner, if it’s like a 50-50 thing? Or is it at this day, in January 1, 2028 or whatever it is, that they’re going to you, basically, hand the keys to Jesse, and then it’s going to be here’s the run. Those are all things I think to get on the table and flesh out to make sure it works for everyone.
Kelly, what’s your take in terms of like – It sounds like they kind of want to simplify life. Obviously, passing on the ownership of the pharmacy to Jesse, they talked about selling the rental property and kind of getting out of the landlord game. What’s your take in terms of timing of that, what to do with the proceeds, etc.?
[00:14:15] KRH: I guess the timing of the sale of the rental property is a pretty well time to have this conversation with the way the housing market is at present. So I guess that’s always a factor, like depending on the urgency, like understanding the market factors in like is it now. Is it maybe wait a bit? We have at present such an interesting situation. We’re coming off like really high rates for purchases, low interest rates earlier in the summer now with the rates rising. So I guess that would be a component is kind of getting some professional advice about the market and whether now is the time.
In terms of what to do with it, like I think it would be interesting to build out. I’ve heard you in the podcast, Tim, talk about the retirement paycheck. So kind of what do they need to have? That pension for Hannah adds a really nice resource, understanding at what year she gets what amount. If there are any other benefits from that pension would be good to know. Like are there any health care benefits, any disability, survivor benefits? So details there but then kind of looking at what’s coming in from the pension, getting their Social Security statements poured.
Then you can took take a look at expenses and see like, okay, well, then I feel like then you’re looking at the debts and seeing like, well, what really does need to be paid off to make that paycheck work with the resources. The rate of the 5% is on the high side. So I like that they’re aggressively paying that off. That probably would be the top thing I would target. The car and the mortgage a little bit less. So but, again, depending on resource, if they really don’t want to have any payments, that does come back to personal preference. We can run some numbers. It’s probably a combination of the two. Like does the paycheck work? Do the financial numbers work? Just how they feel about having some debt going into retirement.
[00:16:18] TB: Yeah. What’s not represented here is probably like what is the rental income that they’re getting from that. So obviously, giving that up for the potential of liquidating the 275,000, which was what we think it’s worth and then, again, how to apply that to the debt. To your point, I’m less concerned about that. I think maybe getting rid of the HELOC. Maybe the car note and then keeping the mortgage rolling could be kind of a balance.
But right now, where the market is, is like if you have cash to potentially put in the market, now’s the best time to do it because of how depressed prices are. Again, not an advocate of timing the market, but it could be that we’ve lined up the sale along with – To Robert’s point, when we exit the pharmacy and kind of do it in one fell swoop. Or just kind of let the market drive it in terms of maybe you list it for sale or you try to rent it simultaneously and see what comes out. So I think there’s a little bit of give there. We don’t – There’s not an overwhelming need for cash, I think, as we as we sit here but definitely something to kind of, again, flesh out with regard to the plan.
Robert, from an insurance perspective, is there anything that kind of jumps out here? Obviously, Kelly mentioned the pension. One of the things I did look up in Minnesota, if you’re a state employee, you do get Social Security as well. So she’ll have that. A lot of state employees don’t pay in Social Securities. They don’t have that benefit. So that’ll – She’ll kind of be able to get both. But in terms of like looking at the pension, looking at health care, Medicare, she has some life disability. Do you have any big concerns from an insurance perspective, as you’re kind of approaching this plan?
[00:18:01] RL: It’s hard to say kind of what that overall perspective looks like. I think their life insurance policies are in a good place right now. Aman’s going to go out till 70. She’s going to go till 66. She’s got the short-term long-term disability and Social Security disability benefits from them. He doesn’t have any disability benefits. But as a pharmacy owner with a daughter working there, you could probably finagle some work that you could still accomplish for an income.
The professional liability is there. I’d be interested in starting to look at maybe some long-term care, depending on what the parents look like. What does mom and dad look like from then? Are they still around? Is this something that they’re going to have to care for? Then what that longevity looks like for Hannah and Aman. Are they going to be expecting to do some long-term care? Because as we approach that age 60, it starts to become more of a conversation of is this a policy we need to be looking into? But yeah.
[00:18:51] TB: Yeah. I think the other thing – So if we look at – You kind of mentioned not having anything through the pharmacy. I think one of the things that is glaring is the lack of a 401(k) offering, which a lot of small businesses, independent pharmacies don’t offer. I think it’s because of like the expense related to 401(k)s. I think there are options out there. So that would be something that I would be talking too about them, once the dust settles or some of these initial things, is to kind of open up that bucket. So they can defer. Jesse could defer for herself. Even if Aman is planning to do that, it’s to kind of set up that bucket. So it’s another place to basically get retirement funds set aside. So I would definitely encourage that.
In terms of the investments, obviously, they’re pretty conservative to balance between the two of them, which is not necessarily a bad thing to be three to five years from retirement. That’s probably fine. But when we get post retirement and kind of outside of the eye of the storm with [inaudible 00:19:53] risk, we’re going to have to adjust that once we get kind of everything rolling.
But, yeah, I think the big thing here is really to start the conversations, if they haven’t already, and with the CPA, with the attorney, just to make sure everything is tracking to what they’re trying to do. I think the big thing that I would be talking to the two of them about is you got to make sure you’re taking – Anytime you have kids, it’s making sure you’re taking care of yourself and your retirement and not being, I don’t want to say, overly generous with the deal. But you want to make sure that it’s structured in a way that benefits both.
I know you’re concerned about Jesse’s loans as well. But at the end of the day, we need to make sure that the retirement nest egg has longevity and that Aman and Hannah don’t have to go back into the workforce to kind of sustain their livelihoods. So a lot going on here. Anything else that you guys would call out with regard to the plan?
[00:20:49] RL: A good taxable investment that they’re doing, I think there might be a better use for that. Basically, it sounds like they took some of that mortgage money that they weren’t paying before, minus the property taxes, and they started putting it into a taxable account, which is a strong idea. Let’s have that money grow for us in the future. But I think if we’re putting that in 1,400 hours a month, that money – We could max out her 403(b). So let’s get that 403(b) maxed out. That brings down the adjusted gross income, which might even get us below or close to that threshold, where we could start making some sort of Roth contributions again.
They’re over 50, so they get a little bit of plus up, so using a little bit of gap there. So if we can get under that threshold, that would be a nice place to just get more money going towards the retirement, instead of in a taxable account.
[00:21:27] TB: That’s great point. So the catch up for the Roth IRAs, they could put up to 7,000. So 6,000 plus $1,000 catch up. Then for the 403(b), I think they have a special provision, where it’s 20,500. I think it’s an extra 6,500 for catch up. 403(b)s have kind of some special rules with regard to the catch up, but that would be another place to put dollars. I definitely want to see a balance of Roth, taxable, and pre-tax, which I think they have a good – But to your point, they probably could plus up more into Hannah’s, potentially open up the Roth IRA. I think they have a sizable enough taxable portion that if they needed to draw from that, in addition to IRAs, as they’re waiting to claim Social Security, there’s probably enough there to do that. Again, we’d have to model that out and see. But potentially, take advantage of the 403(b) while it’s there. So that’s a great point, Robert. Anything else that you guys would fall out here? I think we covered a lot of ground.
[00:22:29] KRH: I mean, I would agree with the investment assessment. I mean, even exploring backdoor Roths if they’re over the limit. At some point, you’ll model Roth conversions, potentially as well with other resources when the time is right. I guess the other thing with insurance too, if he does sell it, if Aman sells the pharmacy to his daughter, and there’s a buy-sell agreement, like often that involves insurance as well, if they’re partners and kind of just keeping an eye on that.
[00:22:59] TB: Liability, cross purchase, key person, all of those things probably just need to be relooked at and potentially even bringing in an insurance professional to make sure that that’s all looking good. Yeah. So I think those are good points as well.
Well, guys, I really appreciate the thoughts on this. I think a lot of work to do. I think a lot of coordination, obviously, with the sale of an asset, transitioning into retirement, working with family. There’s I think good constructive conversation to be had. So I appreciate your guys’ thoughts on this case study today, and I’m looking forward to doing the next one.
[00:23:32] KRH: Okay.
[00:23:32] RL: Sounds good.
[00:23:33] KRH: Thank you.
[OUTRO]
[00:23:34] TU: As we conclude this week’s podcast, an important reminder that the content on this show is provided to you for informational purposes only and is not intended to provide and should not be relied on for investment or any other advice. Information in the podcast and corresponding materials should not be construed as a solicitation or offer to buy or sell any investment or related financial products. We urge listeners to consult with a financial advisor with respect to any investment.
Furthermore, the information contained in our archived newsletters, blog posts, and podcasts is not updated and may not be accurate at the time you listen to it on the podcast. Opinions and analyses expressed herein are solely those of Your Financial Pharmacist, unless otherwise noted, and constitute judgments as of the dates published. Such information may contain forward-looking statements that are not intended to be guarantees of future events. Actual results could differ materially from those anticipated in the forward-looking statements. For more information, please visit yourfinancialpharmacist.com/disclaimer.
Thank you, again, for your support of the Your Financial Pharmacist Podcast. Have a great rest of your week.
[END]
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