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Your Business Shouldn't Be Your Retirement Plan

Posted by: Today's Tip Contributor on June 2, 2010

All too often, business owners lack knowledge of the true value of their business. Moreover, many may not truly understand the cost of financial independence, or the money needed to maintain their lifestyles. These oversights, combined with the intent to rely on the eventual sale of their business for retirement, could be financially devastating.

The factors that come into play are academic. Maintaining an attractive lifestyle is expensive. As a rule of thumb, for a 60-year-old it takes about $1 million in savings to produce an income of $45,000 per year for the rest of his or her life, keeping up with inflation. Following this estimate, a lifestyle of $200,000 to $300,000 per year may require $3 million to $5 million or more in savings, plus Social Security at retirement.

How do you know if your business is worth enough for you to retire? Many businesses are best evaluated and valued on their ability to produce free cash flow. The simple definition of free cash flow is the profit that a business produces over and above the owner’s salary and necessary capital investments.

In many cases, owners who take a large salary but have little involvement in the operations of the business can significantly improve free cash flow. They may be replaced by a less expensive resource upon the sale, with the balance of their salary contributing to free cash flow. On the other hand, this is complicated by owners who are heavily involved in their businesses. If the business requires the same talent to keep it running after the sale, a highly paid individual or new owner will be required, leaving very little free cash flow to service the debt of the purchase.

To avoid jeopardizing retirement plans and goals, business owners should survey the current, true value of their businesses, as well as learn about the factors that influence value, such as free cash flow, business life cycle, and market conditions unique to their offering. Equally important is how this relates to the unique balance between their personal balance sheet and the cost of meeting their lifetime income obligation.

Mike McGervey
President and Founder
McGervey Wealth Management
North Canton, Ohio

Reader Comments

Prof P.Madhu Sudana Rao,Ethiopia

June 10, 2010 10:19 PM

The way you will spend your youth in business, the consequences you will experience when you retire. The winner was one who after a great working life retired in a grand castle, while the loser had a bad career throughout who would emerge as bankrupt in the end. Since a business involves lot of risks and tensions ,it is better not to deeply participate in regular and day to day activities of but to play only an advisory role. Efforts should be made to reduce risks in the business, if inevitable to participate.
For most of us common people, ending up in a palace is nothing but a big dream. But with little efforts we can make our retired lives really enjoyable and truly meaningful.
Remaining healthy and active is the key to a happy retired life. Being happy and healthy on the hand depends to a considerable extent where you stay. So face the reality and accept the fact that as you grow older, it is always better to move to some kind of retirement home. It not only makes your life much smoother, it also saves on your children’s anxiety and unnecessary hassles.
Then location is another important criterion for influencing your decision. Majority of the senior people look for proximity with their children and grand children. It gives you greater freedom to see your near and dear ones as and when you wish.
Also consider the climate. Does your health condition require you to live in a warmer place? Or are you in perfect shape to withstand all the climatic assaults? Keep these points in mind while choosing the retirement home for you. A long term arrangement is always preferable to temporary arrangement. So make a planned move to choose a center that is likely to be your home for many years to come.
If you are essentially a private business person, carefully assess the arrangements of the home. Remember, as the level of assistance grows, your privacy would be reduced. If you want privacy, Continuing Care Retirement Community and independent living will be your best solution as opposed to a board and care home or a nursing home Also go through the center’s brochure to know what type of personal and medical care’s and what types of recreational facilities are provided.
The secret behind a happy and healthy retired life lies in finding the retirement home that matches your lifestyle and your personality. So take a little trouble to do researches; the above mentioned tips will give your efforts the proper direction. Spend some times with the residents of the communities of your choice…an insider’s view is the best way to learn about the advantages and disadvantages of a retirement home. The only thing I might add would be a garden to play in with my summers free to entertain my grandkids.
People believe that to live happily in retirement, family, friends and health are more important than money, and that one cannot depend on the government for their retirement life. As competition gets ever fiercer due to globalization, pressures at work are causing people to opt for early retirement; however, many cannot do so due to financial considerations, and there is no guaranteed lifelong employment on the market. But also to ensure that one has a retirement fund sufficient for a happy retirement life, with no debts.

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