Worried About Portfolio Construction

Summary

Podcast Summary: "Worried About Portfolio Construction" – Jill on Money with Jill Schlesinger

Release Date: June 2, 2025
Host: Jill Schlesinger, CFP® | Co-Host: Mark (Last Name Unspecified)

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Introduction

In the episode titled "Worried About Portfolio Construction," host Jill Schlesinger and co-host Mark delve into the intricate challenges faced by high-net-worth individuals as they approach retirement. The discussion centers around portfolio diversification, risk management, and strategic financial planning to ensure a secure and balanced financial future.

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Caller Profile: William from California (02:08 - 05:07)

The episode features William, a 55-year-old small business owner from California, joining the show to seek advice on de-risking his substantial financial portfolio as he nears retirement.

Notable Quote:

Mark: "Welcome to the Jill on Money show. It's Monday, June 2nd and we are here trying to help you make better, sometimes less bad financial decisions." (02:08)

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Financial Situation Overview (05:04 - 07:56)

William outlines his financial landscape:

• Total Portfolio: Approximately $20 million.
• Business Investment: $15 million tied up in a family-owned business.
• External Investments: $5 million in diversified Vanguard index funds.
• Real Estate: Owns a home worth $950,000 with no mortgage.
• Annual Expenditures: Roughly $140,000 to $150,000.

Notable Quote:

William: "Well, I would say our portfolio is roughly 20 million." (05:12)
Mark: "That's pretty reasonable. Do you guys own your home?" (07:56)

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Primary Concerns: Portfolio Concentration and Retirement Planning (07:56 - 09:54)

William expresses anxiety over the concentration of his wealth in the business and seeks strategies to balance his portfolio without fully exiting the business, aiming for a "retire. Ish" scenario.

Notable Quote:

William: "I wake up every morning to your show. I'm just worried about more or less de risking our portfolio." (03:48)
Mark: "So I think you need sort of two types of folks. One is the kind of person who's going to help you explore the ESOP." (11:00)

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Exploring De-Risking Strategies: ESOP vs. Outright Sale (09:54 - 13:46)

The conversation shifts to potential methods for de-risking, focusing on Employee Stock Ownership Plans (ESOP) and outright sale of the business.

• ESOP: Allows gradual divestment while maintaining some control and providing tax advantages.
• Outright Sale: Offers immediate liquidity but requires relinquishing control and facing significant tax implications.

Notable Quote:

Mark: "If you set an ESOP... it's a tax exemption thing, and then only half of the company's profits would be flowing through to us on a K1." (14:21)
William: "I was thinking about lowering my equity stake in the business so that I had more of it in almost balanced portfolio." (09:44)

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Tax Considerations and Roth Conversions (15:32 - 16:44)

William inquires about Roth IRA conversions, referencing tax strategies advocated by financial expert Ed Slott. Mark advises taking advantage of the current low tax environment to convert pre-tax retirement accounts to Roth accounts, emphasizing the long-term tax benefits.

Notable Quote:

Mark: "I would totally, I would convert all of that. I would get, I mean, what's the difference? You're going to be in a high tax bracket." (16:18)
William: "Why not my Ed Slott question?" (15:32)

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Estate Planning and Final Considerations (16:54 - 17:05)

William mentions that his estate planning is recently updated, ensuring his assets are protected and efficiently passed on to heirs.

Notable Quote:

Mark: "The estate planning." (16:48)
William: "We just updated all that and it's all done." (16:49)

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Advice and Encouragement (17:00 - 18:18)

Mark and Jill commend William on his accomplishments and encourage him to proceed with his de-risking strategies, highlighting the importance of balancing business interests with personal financial security. They invite listeners to share their stories and seek personalized advice.

Notable Quote:

Mark: "It's really like I need to take some money off the table. What is the most efficient way for me to get out of this business?" (10:03)
Jill Schlesinger: "Don't let what you don't know stop you from starting your next chapter." (End Segment)

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Key Takeaways and Insights

1. Portfolio Diversification: High concentration in a single asset (e.g., a business) poses significant risks, especially as retirement approaches. Diversifying investments can mitigate potential downturns.

2. De-Risking Strategies: Exploring options like ESOPs can provide tax benefits and gradual divestment, whereas outright sales offer immediate liquidity but come with higher tax burdens.

3. Tax Efficiency: Converting pre-tax retirement accounts to Roth accounts during lower tax periods can lead to substantial long-term tax savings.

4. Emotional Considerations: Transitioning out of a business isn't just a financial decision but also an emotional one. Ensuring personal fulfillment during retirement is crucial.

5. Professional Guidance: Engaging with financial advisors, tax consultants, and business advisors is essential in navigating complex financial transitions.

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Conclusion

This episode of Jill on Money provides valuable insights into the complexities of portfolio construction and risk management for individuals with significant business holdings. William's case exemplifies the challenges of balancing business investment with personal financial security, highlighting the importance of strategic planning and professional advice.

Listeners grappling with similar financial dilemmas can take away the necessity of diversification, proactive tax planning, and the benefits of structured de-risking strategies to ensure a stable and fulfilling retirement.

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For further assistance or to share your financial story, visit Jillonmoney.com and click the "Contact Us" button.

Transcript

[Jill Schlesinger]

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[Mark]

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[Jill Schlesinger]

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[Mark]

Welcome to the Jill on Money show. It's Monday, June 2nd and we are here trying to help you make better, sometimes less bad financial decisions. If you've got a question, all you need to do is go to our website, jillonmoney.com, click the contact Us button and write us a note. Now if that is too much for you, if you're like, oh no, I can't possibly do this. I can't do this. I can't write a whole long it's okay. Check the box. Mark will bring you on the air with us. And isn't that a nice way to just kind of resolve whatever's going on in your financial life. So if you're thinking, feeling a little bit like writing everything out is too much, come on and join us. We'd love to have you. And we love asking those follow up questions that are so much fun. So. Jillonmoney.com Click the Contact Us button. Check the box if you want to join us on the air. Don't forget to sign up for the free weekly newsletter and check out all of the content that lives on the website, blogs and resources and the free weekly newsletter. Today we are going to start the work week off with William who joins us from California. Hi, William, how are you?

[William]

I'm doing well. How are you, Jill?

[Jill Schlesinger]

Great.

[Mark]

What can we do for you?

[William]

Yeah, I just have some questions about the financial situation, so.

[Mark]

All right, let's do it. How old are you, William?

[William]

I am 55.

[Mark]

Okay. Married? You said we.

[William]

Yes, married.

[Mark]

Okay. How old? Spouse?

[William]

62.

[Mark]

Okay, what's going on with you guys? So what, what are you trying to accomplish here?

[William]

Well, as we approach retirement, which I'm just constantly thinking about, you and me.

[Mark]

Both, man.

[William]

I wake up every morning to your show. I'm just worried about more or less de risking our portfolio. We started a small family business when I was roughly 36, and then it has grown and grown nicely and now we just, we're in a situation where it's kind of. Sometimes I feel above my pay grade because I grew up very humbly in a working class family. Yeah. So right now I'm trying to figure out how to land the plane, so to speak, and kind of de risk the portfolio and maybe not fully retire, but retire. Ish.

[Mark]

Okay, I like ish. So is your spouse in the business with you?

[William]

No, no, she's not.

[Mark]

And is she working full time or not?

[William]

No, I mean, technically she's, she's on our board so she can make enough money to max out her 401k.

[Mark]

So let's talk a little bit about kind of where you stand with your savings. And also, do you have kids that are grown? Where are you in this?

[William]

Yes. Have one. One son who's about ready to launch. Graduating next month from college.

[Mark]

Very exciting. Congratulations. Okay, so now tell us what you've accumulated.

[William]

Well, if, if these numbers are right.

[Mark]

Well, the numbers are going to probably be right in that, you know, you know what you've actually made and put into an account.

[William]

Yeah, I would say our, our, our portfolio is roughly 20 million.

[Jill Schlesinger]

What?

[Mark]

Get out of here.

[William]

Well, that's.

[Mark]

Mark. Mark, we are getting some hate mail.

Come on, don't Hate this guy started young.

I know he's. And he just. Look, and you. Business 20 years ago, when you were 36.

[William]

Yeah. And part of the problem, like, the first issue I want to tackle is most of that net worth is just tied up in the business.

[Mark]

Okay, so of the 20 million, what is it in the business?

[William]

Probably 15.

[Mark]

Okay, so you got 5 million outside 15 million in the business itself. And you say this is a business you can sell?

[William]

Yes, absolutely. It's a business that I could sell. I'm actually more or less exploring an ESOP right now to see if I could sell at least 30 to 50% of it off without giving up control. So I can kind of.

[Mark]

Why not?

[William]

Give up.

[Mark]

Wait a minute.

[Jill Schlesinger]

Give up control?

[Mark]

Get out of this. Why do you need the control? What's wrong with you? Come on.

[William]

I don't know. That's a great question. I mean, I. I must control this.

[Mark]

Even though all I want to do is get liquid and get out, and I'm exhausted.

[William]

Maybe for my son. I mean, he's super young, but at least it preserves the opportunity for him in maybe eight to 10 years, you know, once he gets some experience under his belt. I don't know. I. Sometimes I listen to your show, and I feel like you admonish us for, like, trying to retire too early. I was thinking maybe I could just slide more into a board role and. And hire somebody else to run it.

[Mark]

By the way, I love the idea. You. You.

[Jill Schlesinger]

You admonish.

[Mark]

Admonish us for going. No, I hear what you're saying, but you got a lot of money. Wait a second. Look, can we. Let's go back. So we have the son. He's going to graduate from college. Maybe he'd want to be in the business, maybe not, but. So the business is worth about $15 million. If you set an ESOP, everyone listening. That's an employee stock ownership plan. And you set up a plan where basically the employees can sock away some money and be owners of the business. But if. Is there an opportunity. Let's say you didn't do that. I just want to make sure I understand what the opportunity is. If we just said went into the market, you had a business valuation, you went out and you sold it, you're pretty confident you can get 15 million bucks for it.

[William]

I'd probably walk with 13. Thirteen and a half. I mean, after all the fees and discounting and all that. But, yeah, I mean, right.

[Mark]

Even if you said you walked away and, like, you cleared 10 after paying taxes, let's Just that seemed like a reasonable estimation.

[William]

Sure.

[Mark]

Okay, so then what I'm really dealing with is your 10 million from the business and your 5 million you've socked away. How much money do you guys spend?

[William]

Oh, we're. Like I said, we grew up working class, so we. Well, I would say I did the math. I think we're spending about 140 to 150 a year, all in.

[Mark]

Really? Wow. That's pretty reasonable. Do you guys own your home? Yes. How much is that worth?

[William]

About 950,000.

[Mark]

And there's no mortgage. Yeah, a guy like this has no mortgage. Right, Mark? Okay. And so you got the house any second home or anything like that?

[William]

No. And that was me. Maybe I should have one. I don't know. No, I don't.

[Mark]

Don't feel like you have to have one.

You can hear the struggle, right?

I know. I feel I'm going to put my arms around William and hug him and tell him that it going to be okay. What's the biggest risk right now? The biggest risk that you have is that your business is not exactly worth as much as you thought and it's not going to pay off. But I don't think it sounds like that, you know?

[William]

Yeah, I was thinking it was like just portfolio risk. Like having too much of my net worth concentrated in one stock, if you will. Right.

[Mark]

Yeah, you do. Right, exactly. Which is the business. Right. But the other 5 million, how is that invested generally?

[William]

Mostly, you know, brokerage and retirement.

[Mark]

So pretty like diversified portfolio? Kind of.

[William]

Yeah. It's all vanguard stuff, index funds and things.

[Mark]

And you're managing that yourself?

[William]

Yes.

[Mark]

Do you want to keep doing that?

[William]

Yeah, I'm a nerd. I enjoy it. I get some therapeutic out of it.

[Mark]

Okay, so when you talk about de risking, are you saying de risking like I want to get liquid and sell the business or de risking of the 5 million that's outside of the business.

[William]

I was thinking about lowering my equity stake in the business so that I had more of it in almost balanced portfolio. Like the vanguard stuff.

[Mark]

Yeah, I like that. So what does it mean for you to do the esop? It's going to cost you some money to do it. So someone is helping you figure this out, right?

[William]

Yeah.

[Mark]

Okay. So I love the idea of getting some money off the table. I just want to make sure that you're not taking this one step beyond where it needs to go. Meaning that it's great. I mean, if you love your employees and you. I want to reward them. I want them to be part of this or you know, people who say, like, I'm going to sell my business to my customers, they help me build it all. That is great. But just make sure you understand that, like, what, what's the alternative? If the alternative is, hey, I could sell it in one fell swoop, it's a lot easier. I'll get my money out. They're going to want me to stay for three years just to, you know, some transition period that, that should also potentially be on the table. At least an idea to consider.

[William]

Yes.

[Mark]

Right.

[William]

Yes.

[Mark]

Okay. But I'm, I'm completely in tune with you. Like, we just talked to a guy, he's got a small business and his, his small business is such that he's like, it doesn't really have a value without me. Yours does.

[William]

Yes.

[Mark]

So I think getting. When you say de risking the portfolio, it's like basically saying, I've taken all of the risk in building this business. It's incredible. It's amazing what you've done. So now what is the best way to get out? So I think you need sort of two types of folks. One is the kind of person who's going to help you explore the esop. But obviously you have somebody who is like a business consultant in the, the field that you built this business.

[William]

Yeah, I do have an advisor on, on the ESOP side and even a broker I speak to on the alternative side. I guess my risk of, of selling completely is actually being too young and feeling very disoriented and almost lonely not knowing what I'm going to do. So that's, that's why I kind of like the retire ish side of it where I have some involvement, but. But not work so hard and be able to go and do some fun things.

[Mark]

Right. It could almost be like this. Holding the business in this way or hold. Or keeping one foot in could essentially give you the glide path out, is what you're saying.

[William]

Yeah.

[Mark]

And as long as you're comfortable that, you know, look, you still have a stake in it. So on one hand I'm thinking, this is great, you still have a stake in it. The other hand, it's like, well, if the big business hours and you haven't extracted enough money, is that going to drive you crazy or is it going to drive you crazy to at some point actually say, I am no longer the most important decision maker here. Right. So I just to think that through and weighing the risk, weigh which risk feels scarier to you in the moment. I can tell you that talking to a lot of small business owners like you, what I hear from them is exactly what you're saying, which is like, it's all me and I, I built this thing and I don't know what I would do with myself. And I worry sometimes that, like, okay, but you stay in too long and then some of the equity that you've built up, it's like, it's all well and good, but then you say, actually, I would have been better off just leaving. So whatever deal you cut, you need to make sure there's a way for you to get out in a meaningful way.

[William]

Yes.

[Jill Schlesinger]

Over time.

[Mark]

I don't know what that time is, but that's what I think is important. And then also, as we talked about, like, you need a consultant to help you also understand what are the tax ramifications.

[Jill Schlesinger]

Right.

[William]

Right.

[Mark]

Maybe right now I know I'm in a low tax environment for the, you know, I think this tax deal, whatever it ends up being, is going to continue to be in the next few years.

[Jill Schlesinger]

Maybe.

[Mark]

You really want to say over the next three years, I want to get the bulk of the money out because my tax rate's probably going be to be lower today than it will be in the future. Maybe. I don't know. But again, which is the risk I'm more fearful of? So what is the risk you're more fearful of right now?

[William]

I do worry about the business taking a turn in the future and not maximizing kind of what the present value is and at least getting half of it off the table, so to speak. You know, oddly, I also, I mean, I was thinking one of the benefits of the ESOP is because we're, since we started out as a small business, we're an S corporation. So we're already in a tax regime where a lot of the company's current earnings are at the highest marginal tax rates. So it just makes me feel like I'm almost being a bad steward of the company's money if I'm seeing like 50% of it get taxed.

[Mark]

Yeah.

[William]

Portion of it, you know, here in California. So. So I'm just, I figured with an esop, it's a tax exemption thing, and then only half of the company's profits would be flowing through to us on a K1. Maybe there would be some tax efficiency there as well.

[Mark]

Well, I mean, look, I think you got to weigh both of these, these ideas of getting out. I like an ESOP also. It's more complicated, it costs some money. But maybe it's a better idea. Again, I know you're managing your own money. But this is a place where you can have an expert. Yes. Someone who is doing these, you know, constructing these plans to really guide you to make sure that this is the best thing for you. So I, I love the idea of, you know, when you came on and you said, hey, it's time for me to de risk my portfolio, it's like, it's, it's really like I need to take some money off the table. What is the most efficient way for me to get out of this business? That's what the, the ask is. And the answer is we don't know yet. There's going to be a lot of analysis. I, but in general, I think this is an excellent idea for you. Absolutely excellent idea. I really think that this is an important thing that you do.

[William]

Can I ask you a Roth question? Why not my Ed Slott question? I was wanting to know if Ed Slott was going to jump out of a bush and tell me just to suck it up and pay taxes and Roth any traditional accounts I have, even at a higher tax rate or should I just wait on that?

[Mark]

I mean, look, you, you've got 20 years before your tax bomb goes off. So how much money is in a pre tax retirement account right now?

[William]

We probably have about, we have about 600.

[Mark]

600 grand.

[William]

Yeah. In all of our kind of tax. I'm keeping the HSA out. That's only 24, so.

[Mark]

But I would totally, I would convert all of that. I would get, I mean, what's the difference? You're going to be in a high tax bracket. I would convert it, Mark. Don't you think so?

Yeah, I thought he was gonna say like, you know, 3 or 4 million.

But that's what I thought. Let's do it. Let's get that done.

[William]

Okay.

[Mark]

Yeah, absolutely. Absolutely. Ed would definitely agree. Absolutely. I don't think your tax bracket's going down. You pull 10, $12 million out of this thing, you're always going to have money. That money's going to create money. It. I think you really have to do, do that.

[William]

Okay.

[Mark]

Okay, good.

[William]

Yes, good.

[Mark]

The estate planning.

[William]

Yes. We just, we just updated all that and it's all done.

[Mark]

I'm excited. I want my ten million. He's the ten million dollar man, Mark. He's really the twenty million dollar man.

I love these stories. You never know what, you know what people have going on, you know, And.

I bet your family, I bet your friends around you, they have no idea. They're like, oh, he's got this Little business. Isn't that nice? I feel like they're. There's a lot of stories like this. It's amazing. It's completely amazing. Congratulations. Good for you. And we wish you the best. So give us a holler. Let us know how that approaching retirement goes. Tell us what you ended up doing in terms of esop, outright sale, whatever. And if you've got a small business, we are just rocking and rolling here. We're going to need to get some new sponsors, Mark, that are looking for the folks who have 10, $20 million. All right, that's not mostly you, but it is fun to listen to it. And, you know, we always ask the people about what their business is when we get off the air because it's so fascinating to find out. They're just, they're not like flashy businesses by and large. You would be surprised how you can accumulate wealth doing a lot of different things. If you've got a financial question, give us a holler. Go to Jill on money dot com, click the contact Us button. Write us a note. You want to join us live? Check the box. We'll do everything else. I mean, Mark will. You can subscribe to us on the Odyssey app or wherever you find your favorite podcast. Lift someone up. Change your work, change your wealth, change your life. Thank you for listening. We'll talk to you tomorrow.

[Jill Schlesinger]

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