Burned out and ready for the next big thing.
You may be in your 40s looking to take chips off the table or in your 60s ready to spend more time at the lake.
Retirement planning for entrepreneurs will give you the peace of mind that the move you are making is the right one for you.
A solid retirement plan is key to an overall wealth management plan for business owners.
In this blog, we are going to show you how to build and maintain a retirement plan.
Retirement Planning for Business Owners
Business owners don't love talking about retirement.
Why?
They never really retire and always have their hands in something.
Does this sound like you?
We are going to show you how we plan for people just like you.
We are going to break this blog into two areas.
Creating a retirement plan.
Maintaining a retirement plan.
Let's Dive in.
Create a retirement plan
So you want to retire but you don't know where to start.
Look no further. We are going to follow these three steps to create your retirement plan.
Goal Setting
Lifestyle Cost
How Much Money Do I Need to Retire
Goal Setting
Without goals, it is impossible to build a plan. Walking through a goal-setting discussion can help provide you clarity on several important topics.
Time Goals
The number one topic for business owners is how to spend their time. After all, you have spent decades building organization...and now you are suddenly going to STOP.
For some, this works but for most, it doesn't. Set goals for how you will use your time.
Make up for lost time with family
Volunteer your time with young entrepreneurs
Serve on the board of other companies you can help
We find the best time goals are the ones that are the most fulfilling. When you set your time goals understand that money is important but time is often more valuable.
Money goals
Money makes the world go round. You have probably heard this line before. Although there is truth to this line there is also danger. I encourage business owners to think of money in two buckets.
Needs
Wants
What are the things that I need in my life vs want in my life? These conversations often stem from personal experiences. For example, if an owner grows up with little money they often are more concerned about their needs than wants.
Setting money goals should start with your needs and then progress to your wants.
These money goals are a great transition into the next part of building a retirement plan.
Lifestyle Cost
Knowing what it costs to live your ideal lifestyle is key to a stress-free retirement.
We break these costs into two categories
Fixed Costs
Variable Costs
It is important to think about these costs in these two buckets as it allows you to determine where we can pull back if we need to. More to come on this later.
Fixed costs are ongoing costs that you can't quickly adjust up or down.
Mortgage Payments
Debt Service
Health Care Costs
Think about these as payments that you have to make every month no matter what.
Variable costs are ongoing costs that we could adjust at a moment's notice.
Eating Our for Dinner
Private School Tuition
Country Club Membership
All things that are nice to have but aren't necessary for daily living.
Sitting down and taking a good look at these expenses must be completed in order to have a successful retirement plan. Without these numbers, it would be the same as running your company without an operating budget.
How much money do I need to retire:
This is where the rubber meets the road.
How much you need will be swayed by your lifestyle costs and long-term goals.
The first step is to break your finances into two buckets.
Income Streams
Investable Assets
Income Streams in retirement could include the following.
Social Security
Pension Income
Portfolio Income
Real Estate Income
Required Minimum Distributions
We will add these income streams together and compare this number against your lifestyle costs. Planning often becomes simple when your passive income matches your lifestyle costs.
Rarely is this the case which is where your portfolio comes into play.
When analyzing your investment portfolio we often see the range you can distribute off the portfolio being between 2%-6%.
This is a wide range because it is heavily affected by your current income streams and capital needs. For those who aren't positive about their goals, it makes it difficult to be on the top end of the range (6%).
So how does this play out in reality?
Check out this video where I break down an example Maintaining a retirement plan
Creating a retirement plan is one thing but maintaining it is a different animal.
Unfortunately, many people fall into the trap of creating a plan only to stuff it in a drawer and forget about it.
The reality is that life changes and when it does your financial plan should be updated. We are going to walk through how we use guardrails-based planning to help you maximize your retirement.
There are three primary levers we monitor: 1) Annual Spending
2) Upper and Lower Guardrails
3) Spending vs Available Income
Guardrails-based planning as illustrated above can help you spend more money during your retirement. Here is how is plays out.
First, we need to set the available income. The income we believe can comfortably be spend off of the portfolio while still maintaining the principal.
In this example we have the distribution rate set at 4%. Note that this distribution is largely effected by the following factors.
Time Horizon - The younger you are the lower the distribution rate.
Capital Needs - The more likely you are to need a large chunk of money the lower the rate.
Risk Tolerance - The higher your risk tolerance the higher the distribution rate.
Now that we have our available income setup we move to the guardrails.
The guardrails are a unique planning tool to help you meet your goals in good times and bad times.
The easiest way to think about guardrails is that we will be able to spend more money when the portfolio is increasing in value and less money when the market decreases. This provides a substantially different result than traditional planning. In traditional financial planning, an advisor sets an inflation adjustment on your spending and assumes you will continue to increase your spending regardless of what the portfolio is doing.
We have found this strategy to be unrealistic.
Guardrails-based planning allows us to set an upper and lower bound that we adjust as the portfolio adjusts.
Here is how it works.
If the portfolio is up 20% your available income increases by 10%.
If the portfolio is down 20% your available income decreases by 10%.
Having guardrails allows us to accomplish these objectives.
Maximize the amount of money we can spend off the portfolio.
Use a strategy that protects your portfolio in down markets.
Avoid leaving too much money in your legacy bucket.
When maintaining a retirement plan this is hands down the best way I have seen to keep your plan on track. Remember not to put your financial plan in a drawer. This is not a set-it-and-forget-it strategy. This needs to be constantly monitored to ensure that you keep your retirement plan on track.
Building a retirement plan for a business owner often is not easy, but if done currently it will give you peace of mind.
When in doubt keep it simple.
Set your goals with simple clear guidelines.
Use your guardrails to stay on track.
If you are a business owner looking to retire we are here to help.
Retirement planning should not be avoided. The sooner you plan the better off your retirement will be.
If you are a business owner who is looking to find a financial team that specializes in you, schedule a call, and talk with a Moment founder.
Not sure what questions to ask, check out this video on 10 questions you should ask when interviewing a financial advisor.
Get in Touch With An Advisor
Frequently Asked Questions
Here are some answers to questions I received frequently about this topic.
Are you a fiduciary? Moment Private Wealth serves clients as a fiduciary 100% of the time.
How does Moment Private Wealth make money? We are only paid in one transparent way, by our clients. We receive no kickbacks or participate in any profit-sharing arrangements. Our fees are simple, transparent, and clear for our clients.
How are you different than other financial advisors? We are specialists in working with professional athletes and business owners. We limit the number of new clients we take on. This allows us to provide unparalleled value and highly personalized service to professional athletes and business owners. We work as a team to service our clients. We believe in building a team of “A” players. This ensures our clients receive world-class tax, estate, insurance, and investment strategies. We focus on educating first, then executing.
Where do you hold my investments and how can I see them? Moment Private Wealth uses Fidelity Investments as a third-party custodian for our client investment accounts. As a third-party custodian, Fidelity safeguards and provides reporting to you and the IRS each year. Clients can also access all financial information via the Moment Private Wealth Client Portal.
How do you work with other members of my team? We believe in the power of the team. Our client teams consist of Moment Private Wealth, an accountant, an attorney, a banker, and an insurance specialist. We help our clients build out their team of individuals or work with existing partners clients have. Our goal is to ensure every family has a team of experts to protect their interests.
How much money can I spend in retirement? Retirement spending starts with your goals. Once you have established your goals we recommend deciding a safe withdrawal rate to meet your goals. Using guardrails-based planning will allow you to increase your retirement spending over time.
What is guardrails-based planning? Guardrails-based planning allows families to spend more in their retirement years. It is a strategy that allows your income from your portfolio to increase in good times and decrease during market downturns.
What is a Monte Carlo analysis? This type of analysis takes into account your financial variables and runs a number of different scenarios. You then will receive a probability of success. This probability represents your ability to meet all of the financial goals plugged into your analysis.
How do taxes work as a business owner? When you own a business you are going to get taxed in two ways. First, you will be taxed as an employee through the W2 wages you take from the business. Second, you will be taxed on the profits that your business earns.
What are the best retirement strategies for business owners? Retirement planning as a business owner can seem challenging, but the best strategies are the ones with clear goals and guidelines. At Moment we start with your goals in mind and use financial planning strategies that help you spend the most money during your retirement. All while ensuring you have peace of mind.
*Moment Private Wealth offers information on tax and estate planning that is general in nature. Tax and Legal advice are not provided by Moment Private Wealth. Consult an attorney or tax professional regarding your specific legal or tax situation.
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