Seasonal Business Owners with a Pension Election and No Liquidity Reserve
Marcus (47) and Elena (45) run a landscaping LLC taxed as an S corporation. Revenue is seasonal: about 60% arrives April through September, and they take $10,000 monthly draws year-round. Last year the business netted $185,000. Their $18,000 checking balance routinely dips below $4,000 in February, and their only other liquid asset is a $52,000 brokerage account with $9,000 of unrealized gain. Goals, in their words: replace a $60,000 truck next spring, fund two children (ages 12 and 9) at $120,000 each, pay off a $240,000 mortgage at 4.25% in 18 years, and retire at 65. Elena has a vested pension from a prior employer: $1,450 monthly at 65 or a $168,000 lump sum. Neither has disability coverage. Elena carries the family health insurance through her employer, but she expects to leave that job in two years. They want to add a cash balance plan alongside the 401(k). They have no will and have never reviewed beneficiaries.
1. What should the planner address before funding any of the stated goals, and what quantitative tests support that priority?
Read the worked answer
Priority: solvency and cash-flow timing, not goal funding. Before increasing retirement contributions or committing to college funding, the planner should separate personal and business cash flow and build a liquidity reserve.
Quantitative tests:
- Fixed monthly obligations: if personal fixed costs are about $9,000 (mortgage, taxes, insurance, food, utilities) and business fixed costs about $6,000 (payroll, lease, insurance), six months is roughly $90,000. The $18,000 checking balance covers about five weeks at the February trough.
- The $52,000 brokerage account is the only backup. Selling it for the truck would leave a gap and trigger about $1,350 of long-term capital gain at 15%, a small tax but a large loss of liquidity.
- The $60,000 truck is a known outflow in about nine months. It should be matched to the April-September peak, not the February trough.
Judgement: keep the brokerage as reserve, open a business line of credit as a backstop rather than treating it as the reserve, target $30,000-$40,000 in cash plus the brokerage, and schedule the truck purchase or use equipment financing with payments aligned to seasonal revenue. Disability coverage is a close second: with no coverage and an owner-dependent business, a disability would force the exact liquidation the reserve is meant to prevent. Only after those are addressed should the couple raise 401(k) and cash balance contributions.
2. How should the planner evaluate Elena's $1,450 monthly pension versus the $168,000 lump sum, and what facts would change the recommendation?
Read the worked answer
Start with the implied payout: $1,450 x 12 = $17,400 a year, divided by $168,000 = 10.36%. That is a very high initial payout relative to a 4% portfolio withdrawal ($6,720 a year), so the annuity deserves serious weight. The simple break-even is $168,000 / $17,400 = 9.7 years, or about age 74.7. At a 5% discount rate over 20 years to age 85, the annuity has a present value of roughly $217,000, well above the lump sum.
But the comparison is incomplete without plan documents. The quote is single-life, so it pays nothing after Elena's death; she is widowed now, but a future spouse would be unprotected. There is no cost-of-living adjustment, so inflation erodes the value, and the plan's funding status and PBGC coverage matter. The lump sum is likely calculated under IRS segment rates, so waiting can change it, and it can be rolled to an IRA tax-free.
The annuity is probably the better longevity and sequence-risk hedge, especially because she has no other pension and the payout rate is rich. The lump sum may be better if Elena has impaired health, if the plan is weakly funded outside PBGC protection, or if she needs liquidity for the business. The recommendation should be conditional on survivor-benefit options, COLA, plan funding, and her health, not on the payout rate alone.
3. Identify the missing facts and goal conflicts the planner must resolve before building a written plan.
Read the worked answer
Missing facts fall into four groups:
- Protection: no disability coverage for either spouse; whether Elena's income stops in two years; business continuation if Marcus is disabled; health insurance cost after Elena leaves; life insurance amounts and ownership; estate documents, guardianship, and beneficiary designations.
- Cash flow and tax: actual personal and business fixed expenses; tax bracket and entity elections; the cash balance plan's required contribution, interest crediting rate, and PBGC coverage; whether the plan's contribution commitment is compatible with seasonal cash flow.
- Pension: survivor options, COLA, lump-sum calculation date, plan funding, and PBGC coverage.
- Goals: college cost assumptions and expected parental share; whether the mortgage pay-off is a real goal or a proxy for security; retirement spending, not just retirement age.
The core conflict is that maxing the 401(k) and adding a cash balance plan reduces the cash available for reserve, truck, and college. The cash balance plan is a promise, not a liquid asset, and a required contribution in a slow February could force borrowing. College funding for two children starting in six and nine years competes directly with retirement in 18 years. The planner should present the trade-off explicitly: fund the reserve and disability protection first, set a college number the couple can live with, and only then choose the retirement contribution level.