I have had the good opportunity to work with many people who are retired business owners. Entrepreneurs tend to be cautiously optimistic and are very savvy. They have done a great job building their business’s, making money, and adding value to peoples lives. Often times though they have not had the time nor inclination to really dive into retirement planning. They just make it, save it and keep working harder and harder. Then one day they realize they don’t want to work forever.
One of the questions I often ask in my first meeting is, “If you could wave a magic wand and accomplish just one thing by us meeting today, what would it be?” The common reply usually has something to do with the words clarity and confidence. Sometimes I’ll get the good humored reply of, “I want to earn 20 percent per year.”
What entrepreneurs really want when it comes to their financial lives is an objective and honest assessment of where they stand. They want to know if the numbers will work. They want a plan that gives them clarity so they can have the confidence to retire without having to worry so they can experience the freedom they have worked hard for. What they do not want is a financial adviser who is out to sell them a financial product.
Entrepreneurs are looking for answers to questions and solutions to problems. Entrepreneurs understand the concept of cash flow better than most people because they know they can have all the assets in the world, but at the end of the day, if they don’t have cash and income they may find themselves in trouble because banks lend on income not assets. The last thing they want to do is find themselves in a position where they are having to sell assets at a discount in order to come up with cash to keep operations going.
If you think this is unsettling as a business owner, then try doing this as a person struggling with the same cash flow concept in retirement. When you are working you can make mistakes and recover. Once you have retired, you have less time to recover from a significant error.
Ultimately the two primary concerns most small business owners have as they begin to think about retirement are: How will we pay for health care? and Have we saved enough money to provide cash flow for us to maintain our standard of living for a very long time?
Earlier this year, Fidelity Benefits Consulting estimated that a couple who retires at age 65 is estimated to need $220,000 to cover medical expenses through retirement. This figure does not include any costs associated with nursing home care.
I sometimes joke that the best retirement plan is to run for congress because according to Wikipedia our elected leaders become vested for a pension after five years of service. What I think many of us find really attractive about a pension is the idea of the guaranteed income that a it provides. As an entrepreneur, once you have retired, what you have is what you have and chances are you probably do not want to go back to work if the stock market performs poorly or interest rates rise rapidly.
Most of the people we serve don’t seem interested in running for public office in order to secure a pension. (Although I have a feeling many of the people we serve would do an outstanding job if they did run for public office.) As an entrepreneur you might want to consider creating your own “private pension plan” to solve for your cash flow needs.
In order to accomplish this, you could ladder single premium and fixed deferred annuity contracts to create a guaranteed cash flow. After all a pension is nothing more than an annuity contract. In today’s interest rate environment you could expect a cash flow ranging from five to seven percent depending on the choices you select.
The emphasis when creating a private pension plan is to solve for cash flow in the securest way possible so that you do not have to worry about stock and bond market volatility when providing for your retirement income needs. When you consider mortality risk and treat it as an asset class, you can make some calculated estimates in order to shift the burden of lifetime income from a “what if” to a “guarantee” that the insurance companies can provide.
An annuity contract is the only way we can use the word guarantee when talking about future income. The secret to making this work is to for you to get into the insurance companies pockets as quickly as possible and then live a really long time. Insurance companies are pretty darn good at looking at large groups of people to understand life expectancy risk, but they generally do not look at each individuals life expectancy. If you are in good health and have a history of longevity in your family, then you might want to consider this type of planning.
Once you solve for an inflation adjusted retirement cash flow, then you can take on market risk without having to worry about a market correction disrupting your lifestyle.
As much as we all hate paying for insurance, I think we all hate paying the consequences of not having the right insurance even more.
Obviously many solutions exist for retirement income, but for those entrepreneurs who understand cash flow and its importance, then creating a “private pension” is probably one of the safest ways you can accomplish this goal.
Sometimes because entrepreneurs tend to be cautiously optimistic, they take on more risk than is necessary to accomplish their goals. You’ve worked too hard, accomplished too much and have too much at stake to make a financial mistake at this point in your financial life. Remember, “A bird in the hand is better than two in the bush.”
This article was also featured in the December 2013 Kitsap Peninsula Business Journal.