In most cases, business owners contemplating a sale are simply looking at the sale price and the sale price alone.
And while that makes sense, the sale price is more than just that. This figure shapes what your life will look like after you sell your business.
Here at Consolidated Planning, we seek to plan for the entire picture when it comes to your business. From protection to growth, the right solution makes stepping away from your business not only easier but financially attainable.
In this article, we’ll address two common assumptions business owners face when deciding when to retire and the solutions to maximize what a more ideal retirement can be for you and your family.
2 Common Assumptions When It Comes To Retiring From Your Business
Deciding when and how to retire isn’t black and white. And oftentimes we find that business owners typically face two common problems or assumptions when considering their retirement.
Assumption #1: You Need A Specific Sale Price To Retire
A lot of times, a business owner will say, “I really need X amount to retire.” And, rightfully so, this number you arrive at usually just feels like a good number. Does this sound familiar?
Operating under this assumption actually does your business and retirement a disservice in a few ways:
- You continually put off retirement
- You fail to attract the right buyer
And all because you are doing back of the napkin math, if you will. Using an estimation to determine the value of your life’s work and your post-sale income requirements is not the right approach for your business.
Assumption #2: You Will Withdraw 3-4% Annually From Your Sale Price
From this assumed number, business owners typically default to pulling 4% annually from the sale price. While this is a rule of thumb and a common strategy to generate steady income for your retirement, it isn’t your only option.
Let’s say you were set on your assumed sale price of X. From here, you calculate that today you’re living off of $200K/year. Great. But by dividing $200K by 3% you arrive at a sale price of about $6.5M.
$6.5M.
Not only is your assumption not accounting for all factors to maintain your wealth over the years, you now don’t feel like you can retire because your business is only worth $4M.
Ouch.
So, how can you know if you do have enough money to retire?
Steps To Take To Know You Have Enough Money In Retirement
Retiring from your business is a big decision. It’s a unique transition that’s more than just walking away from work; it’s about ensuring you have enough money to live comfortably and enjoy your retirement. Here are some essential points to consider to help you decide if you’re ready and, more importantly, how to make your retirement funds last as long as you do.
When your math adds up to a sale price of $6.5M, but the business is actually worth $4M. If you net $4M from the sale, that money is non qualified with 100% basis. This means that every dollar of basis you pull out is tax efficient.
But most of the time, business owners invest this money in bonds, CDs, dividends and stocks, that give you 3-4% of cash flow a year. However, this just creates more taxable cash flow. Producing your retirement income this way is really inefficient.
1. Spending Your Money Down the Right Way
Spending down your money…the RIGHT way? Yes, there is a right way to spend the proceeds from your sale price.
When you retire, you’ll want a plan for spending your money efficiently to make sure it lasts. The goal here is to work to maintain the wealth you’ve built while running your business. Instead of diving straight into your retirement savings, consider strategies to:
- Prioritize spending from accounts that are taxable now, leaving tax-deferred accounts (like a traditional IRA) to grow longer.
- Use a “bucket strategy” to manage how and when you withdraw from different accounts over time. This strategy helps avoid large tax hits and stretches your funds further.
2. Generate More Than 4% Off Your Sale Price
When done the right way, you can generate more than traditional 3-4% off your asset base. Now, doing so is far easier shown to you than reading it here.
That’s because doing this retirement income planning exercise is incredibly unique to you – your specific situation and what types of assets are saved on your balance sheet or could be saved.
The traditional “4% rule” suggests taking out 4% of your total savings each year in retirement to avoid running out of money. But sticking rigidly to this rule may not be necessary. Instead you can:
- Adjust your withdrawals as needed based on market performance, especially in years where your investments perform well
- Consider variable withdrawal rates that fit your lifestyle, such as spending a bit more in early retirement when you’re more active and reducing withdrawals in later years
- Work with a financial planner to understand which withdrawal rate best fits your retirement goals and account balances
In addition to these strategies, you can utilize tax advantageous buckets. One of these buckets might include a Roth IRA. A Roth IRA can be incredibly helpful in retirement, as the withdrawals you make from these accounts are not taxed, allowing you to make the most of any tax advantageous savings you’ve set aside.
Money withdrawn from a Roth IRA in retirement is tax-free, as long as certain conditions are met. Using these accounts strategically to keep your taxable income lower, especially in years when you may need to make larger withdrawals for a big expense or planned purchase.
What Options Are Available To You To Retire From Your Business?
You might be surprised to find out that if you’re not ready for retirement right now, you’re likely not far off. When you plan correctly for it, that is.
Ultimately, knowing if you’re ready to retire from your business comes down to balancing your available assets with your expected needs. By building a well-planned withdrawal strategy, budgeting carefully, and understanding tax-advantageous savings, you can set yourself up for financial confidence in those post-business owner days.
To get started on your exit strategy, chat with an experienced business planning professional at Consolidated Planning.
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Exp. 1/2027
Material discussed is meant for general informational purposes only and is not to be construed as tax, legal, or investment advice. Although the information has been gathered from sources believed to be reliable, please note that individual situations can vary. Therefore, the information should be relied upon only when coordinated with individual professional advice.
This material contains the current opinions of Neal Brincefield and Consolidated Planning only. These are not the opinions of Park Avenue Securities, Guardian, or its subsidiaries.
