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No Lifestyle Compromises
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Business New Haven
9/20/1999
By: Alan P. Weiss
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Retirement planning today has become complicated, with many issues that need to be addressed. The first step in developing a successful plan for the business owner is to establish goals, both financial and non-financial. For many people, non-financial issues will determine the quality of their retirement.
In our hypothetical scenario, the goal is retirement income. Better stated, it is the endowment of a long, comfortable and totally worry-free retirement, with no compromise in lifestyle and no real concern about ever running out of money.
Currently, the business owner is earning $250,000 annually. Many of us have heard or read that you will need 70 to 80 percent of your current income when you retire. While that may be possible, it is a myth. The definition of a prosperous retirement is that the pre-retirement income tends to equal the retirement income if the retiree can afford it.
With a business owner, certain expenses that have been paid out of the business (e.g., medical, travel and entertainment) will eventually be paid personally. Hence the income needed in retirement may in fact be even greater than the pre-retirement income.
Therefore, we need to take a closer look at current and projected expenses carefully, essential vs. discretionary spending, structural vs. peripheral expenses and fixed expenses vs. inflation-driven expenses.
Moreover, retirement is no longer one homogenous phase (if it ever was). A plan would be inadequate if you estimate a need of $5,000 in today's dollars, use a three-percent inflation rate and blow that number up with a parabolic curve.
More typically there are different phases of retirement: active, passive and final. The active phase is the wonderful vision of retirement, which draws people out of the productive careers. It is sometimes referred to as "a second childhood without parental supervision." Typically, these are the first ten or 15 years of retirement (depending on when you retire). Each phase has different financial requirements and different financial needs. The plan will need to reflect each phase.
In our example, the value of the business is $850,000 to $1,400,000. Let us assume that the business (when sold) will net $950,000 after taxes. If we add the retirement account of $600,000, and cash assets of $450,000, we get to an even $2,000,000.
If the business owner wants to project a return of eight percent, we know that in the real world the investment will not return a constant eight percent year after year. Yet, in each year of retirement, no matter what the investor returns, he/she needs money to live on.
In years when the actual returns are less than expected returns and withdrawals are made, the future value of the portfolio can be significantly impacted. This is especially true if lower returns occur during the early years of retirement.
This is why it is important to have a plan. So, will the business owner have enough money if he/she wants $200,000 for the first ten years of retirement, $150,000 for the next five years and $100,000 a year for the remainder of his/her life? The only real way to know is to crunch the numbers and monitor the results on an ongoing basis.
When planning for retirement, the biggest issue the business owner should be concerned with is increased longevity. Increased longevity changes income needs, estate planning, investment strategy and the need for long-term care. Every aspect of the financial plan is affected by increased longevity.
Most individuals have an unrealistic idea of how long they will live. If individuals or couples only live a few years longer than they planned for, the terrible truth is that they may need hundreds of thousands dollars more in order to avoid running out of money during retirement.
The typical retiree today will need a greater percentage in equities, due to longevity , inflation, etc. It dispels the myth that 100 minus your age is the amount you should have in equities.
Alan P. Weiss is president of Regent Retirement Planning Inc. in Woodbridge and a registered investment advisor. He is a certified financial planner and chairperson of the Connecticut Society of the Institute of Certified Financial Planners.
Occupation: Business owner
Age: 65
Salary from business: $250,000
Business value: $850,000 TO $1,400,000
Children: 3 adult, plus 7 grandchildren (none in business)
Retirement accounts: $600,000
Other cash assets: $450,000
Home value: $500,000
Mortgage: None
Goal: Retirement income and estate management
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