A very critical part of an Exit Plan is determining how much money you need to retire. Or another way to ask the question is how long the money you have now will last given your current spending and goals.
Money may not buy happiness but it can buy freedom and security.
And those two things contribute significantly to being happy. Money also reduces being sad, according to academic research. Perhaps because having it gives a sense of control over your life and who doesn’t want that?
Money is a difficult subject for most people to talk about. It is a highly emotional and personal topic. Society has “taboos” in talking about money – how much you make and how much you have. Often it’s just better to not talk about it with your friends and family.
But it is a very bad idea not to do a long-term plan. That’s where Exit Planning comes in.
There are several moving pieces here and they all need to be considered together to calculate if you have enough. The key components are:
How much you will spend each year? Spending is dependent on what are your goals and objectives. Not just for your business, but your life. What type of life do you want to have? Imagine your life and make a budget that allows you to live it. Remember, to add in something for unexpected expenses – things you can’t control or plan for such as healthcare.
How long will you live? Only the Almighty knows the answer to this question. But there are actuarial sources that can give you a general guess given your current age, health, and so on. When you plan it is important to over-estimate your lifespan, particularly if you have some long-lived relatives. For planning, we usually recommend considering the possibility of living to 100 and beyond. You may not live that long but who wants to be in their 90s, in good health, looking at your money running out. Given today’s upcoming medical advances that may be a possibility.
What sort of legacy do you want to leave behind? Do you want to leave something to your family or a charity after you are gone? What would you like to see achieved after you are gone? That needs to be factored into the calculations.
How much money have you saved to date plus what can you get from your business? Your assets are where your income will (mostly) be coming from in retirement. Do a personal net worth statement. That includes a business valuation. It is likely your business is your most valuable asset. Your business may be the very best way to increase your net worth by increasing the market value of that business. So take a hard look at the business!
The investment firm Charles Schwab recently asked its customers what they think is enough money. They said that to be financially comfortable requires an average of $1.4 million. To be “wealthy” requires $2.4 million. The responses varied somewhat as the older a person became the amounts increased.
Perhaps most importantly, most of the things that respondents said made them rich were not monetary at all. Like spending time with family or having more time for themselves.
Everything is relative. Most major investment firms consider someone to be deserving of their most specialized services only if they have over $25 million. So what is enough? It’s up to the individual to decide based on their goals.
The first step is to do an Exit Plan, a plan that gets you thinking about all of these things.
