Barron's Tips for a Prosperous Retirement

by: SA Eli Hoffmann

Excerpt from our One Page Barron's Summary (receive it weekly by email by signing up here):

COVER STORY: Glorious Times by Charles Hirshberg and Charting a New Course by Paul Sulivan and Kiss the Tenants Goodbye by J.R. Brandstrader

Summary: Three wealthy couples and two wealthy men are choosing to spend their retirement in a variety of fulfilling and at times philanthropic ventures (rebuilding a delapidated inn, sailboat racing and scuba diving, building an observatory to observe solar prominences, refreshing their childhood village, building a cathedral). The feature examines tax implications: 1) Executives expecting large lump-sum payments should consider moving to a state without personal income tax (FL, TX, WY) 1-year before retiring. 2) Stock options: If exercised within 90 days of retirement, taxes will be 26-28% on paper profits + 15% on sale of shares. After 90 days taxes are 35% on sales of shares. (Bottom line: If the shares go a lot higher, early execution will mean less tax. If not, the opposite could be true.) 3) Stock held separately from 401(k) is taxed as a capital gain (15%); stock in a 401(k) is taked as income (up to 35%). Keep them separate. 4) Taxable compensation can be deferred (min. 5 years) until recipient is in lower tax bracket. To deal with potential solvency risk (i.e. what happens if your employer goes broke in the meantime, think Enron), credit-default swaps transfer default-risk to banks at a relatively low cost (like insurance). Tips: 1) Annual spending shouldn't exceed 4% of assets (which leaves the bulk of the principal intact for heirs/charities). 2) Use sensible diversification. The second feature looks at TICs, tenant-in-common swaps: TICs allow property owners who earn income through rentals and leases to "swap" their investments by selling their properties and buying shares in special funds that deal in similar properties and charge a management fee, removing the onus of popery management from the retiree and deferring the capital gain. Such funds have taken flight since a 2002 IRS ruling clarified their validity. Fine print: 1) Accredited investors must a) have a joint net worth exceeding $1 million or b) individual annual income of more than $200,000, or a joint annual income over $300,000 for the previous two years. 2) Proceeds from the sale of the original property must be earmarked for the swap within 45 days of sales, and the swap must occur with 180 days. Potential risks: 1) There is no secondary market for TIC shares. If you want out, you must go back to the sponsor who sold you the shares. 2) Investors are at risk only for the amount of their stake. 3) Consider investing only with TIC Association members. 4) Investigate the property, including a personal visit, to make sure you're getting your money's worth. Examine vacancy rates, local economy, etc. Typical returns seem to come-in at 7-8%.
Quick comment: As baby-boomers prepare for retirement, Jim Cramer takes some time to think about who stands to benefit. Some of his picks (in the article he explains why he feels these are the cream of the crop): Luxury hotels—Four Seasons Hotel Inc. (FS), Marriott International Inc. (NYSE:MAR), Starwood Hotels & Resorts Worldwide (HOT), Orient-Express Hotels Ltd. (OEH). Leisure time—Las Vegas Sands Corp. (NYSE:LVS), Wynn Resorts Ltd. (NASDAQ:WYNN), International Game Technology (NYSE:IGT), Scientific Games Corp. (NASDAQ:SGMS), Barnes & Noble Inc. (NYSE:BKS), American Express Company (NYSE:AXP). Food and relaxation—Morton's Restaurant Group Inc. (NYSE:MRT-OLD), Ruth's Chris Steak House Inc. (NASDAQ:RUTH), Royal Carribean Cruises Ltd. (NYSE:RCL), Carnival Corp. (NYSE:CCL). However, he strongly discourages any speculation with retirement funds. Barry Gitarts considers the implications for healthcare providers such as Sun Healthcare Group Inc. (NASDAQ:SUNH). Ron Lieber weighs the pros and cons of using ETFs versus index mutual funds in a retirement portfolio; he prefers the former. Geoff Considine examines various retirement portfolio weightings. Seeking Alpha's personal finance section has a retirement page that covers topics such as choosing a financial advisor and tips for moving your 401(k).