Financial Poise
financial planning for retirement

Financial Planning for Retirement — Should I Stay or Should I Go?

Can Your Business Income Provide for Retirement?

Business owners thinking about selling their businesses struggle with one major uncertainty. Will the proceeds allow them to walk away comfortably? Experts say you need at least 80% of your annual, pre-retirement income to live securely as a retiree. But depending on your lifestyle and goals, your actual number might be very different. In order to know how much you can expect from selling your business, do some financial planning for retirement.

Let’s look at this situation with George and Gracie as they navigate  professional financial planning for retirement.

The Scene: Meet George and Gracie

It all started when George asked, “But how do we know our money will last?”

Gracie, got an uncomfortable feeling in the pit of her stomach whenever George asked her those “innocent” questions about savings and retirement. George, a professor at a local college, usually feigned disinterest about money. Gracie was the entrepreneur and MBA, but every once in a while he would surprise her.

The Existing Retirement Plan

Gracie founded her marketing consulting firm 20 years ago, and it occupied an active niche in the media industry. The firm had a strong management team and talented senior consultants in regional offices nationwide. A number of financial and strategic buyers had expressed strong interest in acquiring her business.

Everything was on track for a successful transaction, and the proceeds were right in line with the expectations she had set several years before. Based on the most recent calculations, Gracie would net approximately $5 million from the sale.

Gracie’s personal compensation over the last three years averaged around $400,000 per year. Gracie and George were diligent savers and had set aside approximately $1.5 million in retirement savings. She also invested more in her firm. She was ready to retire. She wanted more time with her family and more time to volunteer in the community. George was ready to scale back his work as well.

How did they know there would be enough money for everything they wanted to do in retirement? None of her advisors had gone into much detail about retirement finances. No one had asked what she and George wanted to do with the money.

“Well, George, it’s a pretty big nest egg,” she said. “We should have plenty in the bank, and we’ll invest some in bonds and maybe some safe stocks. We’ll pretty much live off the interest and shouldn’t have to dip into principal.”

“I see,” George replied. “But I heard bank rates are near zero.”

Gracie did some quick mental math. Something wasn’t quite right, and she knew she needed some advice.

Is it Time to Sell the Business?

Gracie sat down with Thornton Gildersleeve, the advisor working with her on the sale of her business. She expressed concerns about the sale in light of her conversation with George.

Thornton listened carefully then shared some things for Gracie to consider. She could certainly back out of the transition and continue to run her firm and enjoy the business income.

“Gracie,” Thornton said, “will your heart really be in it for a few more years if you decide to stay on? And, if you don’t sell now, when will you sell?”

Over the last several years, Gracie had invested a great deal of energy and effort getting the business in tip-top shape. There was no certainty about future valuations. If the company’s sales or profitability dipped, or if the economy faltered in any way, the value of the company could drop dramatically.

Thornton continued, “Gracie, how would you like to have someone walk you and George through a detailed financial plan? A model, if you will, of your personal cash flow and balance sheet for the rest of your lives?” It was time to start the process of financial planning for retirement.

Financial Planning for Retirement: The First Steps

Gracie’s first meeting with Jack Benny, a Certified Financial Planner, went well. She shared the story of her firm with Jack—from start up, through rapid growth, to preparing for sale. She also talked about her family and her plans for retirement.

“What am I missing?” she asked. “What’s wrong with putting the money in the bank and living off the interest?”

Jack nodded, understanding where her questions came from. “The idea of keeping your money safe and living off the interest is intuitive, and we will focus on safety.” He  saw that financial security was important to Gracie.

“However,” Jack continued, “George is right. Bank CDs pay next to nothing, and low risk bonds, like US Treasury bonds, also pay very little. Bonds have interest rate risk — if market interest rates increase, the value of bond investments fall. What’s more, CD and bond yields don’t account for inflation or taxes. So, in a practical sense, you actually lose money.

“This doesn’t mean you can’t retire — far from it. Many of our clients have this concern. They find a financial plan helpful. It details their goals and crafts an investment strategy to give the best chance of success. They gain a lot of confidence from this.”

“That sounds helpful,” Gracie agreed. “How does it work?”

How Does Financial Planning for Retirement Work?

“First, we work with an advisor to establish what you need to achieve,” Jack told her. “We’ll gather information about your current situation and review your goals and plans. Next, we’ll analyze the data and craft recommendations for you.  We’ll help you implement your plan because a plan isn’t any good just sitting on the shelf. Just as importantly, we’ll help you monitor the plan over time.”

“I’m still not sure this specifically answers my question,” Gracie said. “How do we know we have enough money to retire, and how do we know it will last?”

“Let’s reflect back on the way you were thinking about generating retirement income,” Jack replied. “It’s the same way most people think — live off interest and dividends. Don’t dip into principal. If that amount covers living expenses, you may be okay. Unfortunately, for many people it doesn’t. We overlook the complexity of our lives.

“A financial plan is kind of like a 40 year budget,” he explained. “We carefully review your planned expenditures for the rest of your lives, not just day-to-day living expenses. While things may change, it’s helpful to quantify in a dollar amount what everything is expected to cost. We’ll work on optimizing your tax situation, benefits such as Social Security, and insurance.”

What About Risk?

Jack recognized an important reality about investment risk. Living off interest will not work for most couples. To achieve their financial goals, most people have to accept more investment risk than they anticipated. That said, Jack assured the couple that he would spend the necessary time with them to understand the risk they would be comfortable with. Then, he would use that limited risk budget to achieve the best long-term returns.

“Returns, not income,” Jack told them, “because most professional investment managers focus on total portfolio returns. That includes investment gains as well as dividends and interest. As a result, when the investment markets are flat or down, we do dip into principal. When the markets do well, we save more and add to the principal.”

“How do you know this works?” Gracie asked.

Does Financial Planning for Retirement Guarantee Results?

“The simple answer is — there are no guarantees.” Jack said. “We strive for a high degree of certainty, an 85 to 90% chance of a successful outcome. We do this by running the plan through a thousand or so market scenarios and adjusting the investment strategy accordingly. We’ll review the plan every year or two. If we need to change something, we will.”

Gracie and George asked Jack to prepare a comprehensive retirement plan. It was to focus on a sustainable income stream based on their goals and resources.

The Current Retirement Outlook

Gracie and George expected assets for investment to include $5 million from selling Gracie’s company and $1.5 million in savings. They expected about $50,000 in annual Social Security benefits. Jack determined they had a moderate tolerance towards risk.

The couple owned two homes with a combined value of approximately $1.4 million. Gracie and George were both 66 years old and in excellent health. They owned several life insurance policies with several million dollars in death benefits and approximately $110,000 cash value.

Setting a Retirement Goal

Gracie and George expected to need between $240,000 and $270,000 annually to support their lifestyle. They wanted to substantial support  five grandchildren’s educations beginning in two years.. They felt they had provided very well for their children growing up, so they didn’t plan substantial gifts for them. Nonetheless, they did want to understand the impact of a plan that included leaving about $1 million to their children and to charity. They also wanted to learn about paying for long-term care.

The Second Retirement Planning Meeting

It took Gracie and George a week to gather the information Jack had requested as part of financial planning for retirement. They also had some time to talk about building a retirement strategy for their family.

Now, they met with Jack again to further analyze their plan. Jack explained, “We’re confident that you two can meet your priority goals. We think the investment strategy will feel right to you in terms of risk. We’ll talk about alternatives for some of your secondary goals. We’ve considered everything you wanted. We’lle help you make decisions you’ll feel good about.”

The Financial Plan for Retirement

  1. In terms of annual spending for lifestyle, Gracie and George would start with $250,000.
  2. About $50,000 would come from Social Security, and the remainder would be withdrawn annually from their portfolio.
  3. Jack’s firm earmarked about $250,000 for the grandchildren’s education.
  4. After considering a thousand or so market scenarios, Jack was confident there would be an inheritance of nearly $1 million left at the end of the plan.

How Does that Sound so Far?

“It seems like we’re cutting too much at the beginning,” George replied. “We want to be able to enjoy things while we’re still young.”

George explained the couple’s desire to travel more  the next few years.

Jack explained that the $250,000 spending scenario was based on level spending — adjusted for inflation — for the remainder of their retirement. Some people anticipate spending more money earlier in retirement and a little less later on. He suggested considering such an alternative.“Can you help us understand how we get $200,000 per year when CD rates are so low?” Gracie asked.

Jack replied, “We anticipate a portfolio of $5.25 million after setting aside $250,000 for the grandchildren’s education. So, $200,000 represents a bit less than a 4% withdrawal rate, about average. Managing a portfolio for total return creates the best chance of meeting long-term goals. Since long-term returns are in the 5 to7% range, we believe that withdrawing this amount will be safe.”

“Why did you set aside the college money?” George asked.

“For a couple of reasons, George,” Jack answered. “Setting aside money is a good way to make sure you can afford a major goal. Additionally, it makes sense to meet our goals in a tax-efficient manner. And in this case, we recommend tax advantaged college savings, like 529 plans. We’ve set aside about $50,000 per child. That will nearly cover one year of expenses. Since 529 plans are flexible, you control who uses the money and when. This is important if some children receive scholarships or others don’t go to college.”

“What about insurance?” Gracie asked.

“We’ll follow up on insurance in detail,” Jack told her. “According to our life insurance needs analysis, no one is dependent on your incomes in the future. So, neither of you need life insurance any longer. However, we will consider exchanging policies with cash value for policies with long-term care benefits.”

Coming to an Agreement on Retirement

“This is starting to make sense,” Gracie said. “You’ve laid out a plan providing a good amount of retirement income for us. We’ll have  more spending money in the early years. There’s money set aside for our grandchildren’s education. You’re not investing all our money in bank CDs. It’ll be in an investment portfolio aligned with our risk tolerance.”

Jack agreed. “We’ll review the plan annually to keep both investment returns and spending on track. We can decide what to adjust.”

Financial Planning for Retirement = Confident Future

Gracie and George felt more confident in their retirement plan. Jack would work with them to restructure their insurance, help with estate planning, and find ways to minimize taxes.

Did they sell their business? Perhaps.

The concerns surrounding retirement income were not the only issues Gracie and George considered. They would look at business transition planning, too. Maybe their daughter would want the business. They might consider selling to an employee stock ownership plan, or ESOP. Whatever their ultimate decision, their financial planning for retirement would not end until they recognized and resolved these issues.


Read more:

[Editors’ Note: To learn more about this and related topics, you may want to attend the following on-demand webinars (which you can listen to at your leisure and each includes a comprehensive customer PowerPoint about the topic):

This is an updated version of an article originally published on March 27, 2015. It has been updated by Nora Willi]

©2022. DailyDACTM, LLC d/b/a/ Financial PoiseTM. This article is subject to the disclaimers found here.

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About Edward W. "Tad" Gray III

Tad Gray, CFP®, CIMA® is a Relationship Manager of Financial Solutions Advisory Group, an independent fee-only wealth management firm. People who work with Tad are busy professionals whose primary financial concern is staying on track toward the promises they’ve made. They trust, that together, they’ll make financial decisions that will ensure they keep these promises.…

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