Business Owners – 3 Overlooked Numbers for Retirement

September 26, 2016Exit Strategies, Family Business, Selling a Business, Succession Planning

Every business owner will need to come to terms with an inevitable retirement. Some plan years in advance, bolstering retirement accounts and establishing diverse portfolios. Others chance that the sale of the business will fully fund their post-business lifestyle.

The key to setting yourself up for a successful retirement is to determine how much you will need to live on each month then build a plan to reach that number. At Exit Consulting Group we work with business owners to identify this number prior to selling their business.

We continually see entrepreneurs overlook three things when planning for retirement.

1) Writing Off Business Expenses

Once you leave the business, you will be left holding the tab for bills the business previously covered. Cell phone plans still need to be paid. Trips previously recounted as business related still seem to happen. Lunches with business acquaintances still show up on the calendar. Computer equipment and cell phones need replacement.

Every single one of these items moving forward will need to be paid with after tax dollars. That 40% bump will be financially substantial. In other words, it will hurt.

Make a list of every expense the business currently carries. Add these costs into your budget. Double-check these figures with your CPA. Many business owners overlook small monthly expenses.

2) Paying for Insurances

There’s no denying that corporate medical plans are great. With the dental and eye care, you’re covered from head to toe.

Once you retire, it’s up to you to navigate the medical insurance space. From footing the bill to finding coverage to comparing plans, it’s a lot to tackle. Additionally, most retired business owners find that the coverage they elect following their exit covers less. This adds up quickly as retirees require more frequent medical visits.

Medical insurance isn’t the only coverage you need to include in your post-business budget. Life insurances and car insurance now fall to you.

Add these costs to the running tab.

3) Defining a Personal Budget 

Now to tackle the elephant in the room. In order to accurately determine how much you need to live on each month in retirement, you have to pinpoint exactly how much money you need to sustain your desired lifestyle.

It’s likely you will be starting from scratch with a budget.

Business owners often co-mingle their personal finances with business finances. Either that or the business has a balance sheet where their personal life operates without a budget. In short, the majority of business owners we work with do not have a personal month-to-month budget.

This leaves them vulnerable when dictating how much they need to retire. How can you plan for an amount you don’t know?

Create a monthly budget for your current lifestyle. Add in the costs from the two previous sections to create a retirement budget.

Building a Comprehensive Plan

Outlining costs is only the first step. Now we know how much you need to have to sustain your current lifestyle. The next step is to determine how much you have to work with now, and create ways to fill the gaps.

When sitting down to plan out your retirement, you need to analyze your entire portfolio. We consider it a personal balance sheet and income statement.

This comprehensive outlook covers all your income sources, from salary to dividends to rental income. Then we add in assets, such as real estate and investments. This is also a good time to review their market returns and ensure you are invested well. Lastly, we look at debt.

This gives you an accurate picture to gauge where you are against where you need to be at retirement.

Just like with your business, ideally you will diversify your retirement income sources. Gambling your entire retirement on the sale of the business creates a lot of risk. In business, you don’t want a single customer representing 80% of your revenue. Your business shouldn’t equal that much of your retirement. Creating a portfolio mix of real estate, cash, stocks, retirement savings and the business gives you a more stable position heading into the golden years.

Planning for retirement is an important component of building your business exit strategy. If you are planning to sell your business in the next three to five years, connect with our team to start today.