The Retiring Founder and the Concentrated Stock
Margaret, 63, is the founder of a mid-sized logistics firm. Her net worth is $9.4 million, of which $6.1 million is company stock and $1.2 million is a vested deferred-compensation balance tied to the same firm. She plans to sell the business within 18 months at an uncertain price. Her liquid diversified portfolio is $1.6 million. She needs $180,000 per year after tax to live on and wants to retire in two years. She has $500,000 in cash and a $400,000 mortgage at 6.2%. She asks whether she can retire early and gift $250,000 to each of two children next year.
1. How should the advisor frame the concentration risk and sequencing before answering her retirement question?
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Recall alone cannot resolve this; the advisor must reason from her total exposure. Direct stock ($6.1M) plus deferred comp ($1.2M) equals $7.3M, or roughly 78% of net worth, exposed to one firm. That violates prudent diversification and makes her retirement date contingent on a single liquidity event. The advisor should separate the questions: (1) Is the business sale likely to close and at what range? (2) What spending bridge is needed if it slips? Her $1.6M diversified portfolio plus $500K cash can fund $180K/year for several years, but the $400K mortgage at 6.2% is a guaranteed cost that competes with that bridge. Gifting $500K next year before the sale would erode the bridge and should be deferred or conditioned on sale proceeds. The advisor should quantify a downside scenario, set a minimum acceptable sale price, and recommend a pre-sale liquidity plan rather than endorsing early retirement on an assumed exit.
2. She insists on making the $500,000 in gifts next year regardless of the sale. What trade-offs should the advisor document?
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The advisor should show the arithmetic of the trade-off instead of simply refusing. Gifts of $500K reduce her liquid cushion from $2.1M (portfolio plus cash) to $1.6M. At $180K/year, that is roughly 8.9 years of spending before the mortgage and taxes, versus about 11.7 years before gifting. If the sale slips two years, she draws down the cushion during a period when the concentrated position cannot be sold, increasing the chance she must sell stock at a discount or borrow. The advisor should also note that gifting appreciated stock before a sale can shift future gain to the children, but only if the gift is structured and the children's tax situation supports it. The documentation should state the assumed sale timing, a downside case, and her acknowledgment that early retirement and the gifts are contingent on the exit. The advisor's duty is informed consent, not veto.