Retirement – you may already have a date in mind, a particular birthday or after a certain number of years in the CEO’s position, but will the money be there to support your retirement needs when the date rolls around? Many people get to their hoped for retirement date only to find their finances are insufficient and their dreams need to be put on hold. Planning for your retirement from the business should be a long term and well thought out process so that it can happen when you want it to. There are a number of steps you can take to set a realistic retirement date.
First, you must determine what your financial needs will be during your retirement, and that means budgeting for an unknown number of years. Some financial planners use 70 percent to 75 percent of pre-retirement income as a general rule, but this only applies if your financial needs actually decrease after your retirement.
Similarly, a little forward planning can allow you to minimize your expenses and reduce or eliminate many debts by the time you expect to retire, for example, by paying off existing mortgages and other long term debt obligations.
Regardless of the post-retirement income you think you’ll need, experience shows that most retirees find they need more than they originally anticipated, so it’s always wise to include a contingency in your estimates of the income required.
Still, for many business people what they are really relying on is a good sale price for their business as the major contributor to their retirement income. That means some expert advice from an evaluator. But there is still a piece of the jigsaw missing – you could be taking the opportunity of the years between now and your retirement to actually improve the value of your business by improving its cash flow. As an experienced business owner you’ll have an appreciation of the importance of cash flow. It’s always referred to as the ‘lifeblood’ of a company and rightly so, and it will also have a major bearing on the value of the business at time of sale, and therefore on when you can actually retire from your company.
Cash flow is what buyers want
The first consideration is that when you’re looking for someone to buy your business they’ll be looking carefully at its cash flow. The cash flow generated by the organization is what gives the business its real value. To put it another way, nobody pays for ‘potential’; what they purchase is a machine that makes money.
It’s cash flow that will enable the buyer to pay you for the business, and that’s equally important if you’re selling out to employees or expecting a member of the younger generation to take over and provide an income flow for your years of retirement. It’s absolutely essential that you have a forecast of your cash flow up to the time of your projected retirement – and as far beyond as estimates can be made. If the forecast indicates that the firm’s cash flow won’t be sufficient to cover all your objectives then you may have to do one of the following:
- Set a later retirement date
- Phase out your departure from the business
- Find a purchaser with cash instead of financing a relative into the business
- Find ways to increase the value of the business so it brings a higher sale price
- Reduce your retirement lifestyle expectations
Take steps to improve your cash flow
It might prove a painful reality check, but preparing an estimate of the business’ future cash flow is an essential part of retirement planning and a reminder that your long term dreams rely on how well you manage the business’ operations to maximize it.
Information in this article is sourced from RAN ONE, Inc