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University of Massachusetts Amherst

Family Business Center

Good Retirement Planning Ensures a Smooth Transition

In the 21st century, retirement isn’t what it used to be. When the leader has a solid plan, a strong company culture is created.

By Charles D. Epstein, CLU, ChFC, AIF®

When asked, “What’s your retirement plan?” most family business owners will answer, “My business.” Their interest in their company is their largest asset. But can this asset be turned into an income stream -- one that will generate paychecks that can support the lifestyle the owner and spouse have become accustomed to, for the rest of their lives?

A New Approach

In his bestselling book The Number, Lee Eisenberg sets out to uncover how much you really need (in the bank or in investments) to replace 70%, 80% or 100% of your current income for the rest of your life. The table below gives the number in its simplest terms:

If your income is $50,000 - $100,000 you need … $1 - $2 million Assuming you are what age?

$175,000 - $250,000 you need…$2 - $5 million

$350,000 - $500,000 you need …$ 7 -$10 million

> $1,000,000 you need …> $20 million

But for a family business owner, a myriad of factors help determine the real number. Some of these factors have to do with dollars; others involve quality of life and personal pursuits. As Baby Boomers age, Madison Avenue has started stressing that people don’t retire, in the classic sense, anymore (just look at the Rolling Stones!). Rather, they move on to what they desire to do next. We call it “Desirement Planning”-- crafting a life for yourself after your working years that supports your aspirations and happiness.

Family business owners must start planning for their “Desirement Years” as soon as possible. As a solid leader, you must develop and implement strategies and solutions for funding your desirement number -- without financially burdening the next generation. Otherwise, the only means of funding your lifestyle may be to sell the business to an outsider or for you to continue working at the company during your desirement years.

In our practice, we ask family business owners to imagine they are ready to retire but are unable to sell their business interest owing to market conditions, outside competition or no one from the inside (or the next generation) who is willing or able to buy.

What would you do? How would you replace your income? What resources would you have to generate paychecks for life?

Steps To A Successful Outcome

  1. Start Early. The sooner you begin to strategically develop your retirement plan, the greater your chances for success. Time is your greatest ally if you start early. Compound interest (the eighth wonder of the world) is on your side!
  2. Perform a “Gap Analysis”. Although family business owners watch their business cash flow daily, most do not pay close attention to the cash flow of their personal finances. “If my business is healthy,” they say, “my personal income will be healthy.” But faith alone is not enough. Business owners should work with their financial advisers to conduct a “gap analysis” -- a cash flow simulation model -- regularly. This will help them determine the steps they should take today to generate the lifetime income they will need in retirement.

The ‘Second Economy’

The real benefit of performing a gap analysis as early as possible is that it forces the business owner to acknowledge the need to create a “second economy” of assets outside the business. These assets will one day be used to fund either all or a large portion of the business owner’s income needs during the “Desirement Years.” This “alternative wealth” can be made up of real estate, qualified and nonqualified retirement plans, and investments.

A family business owner who successfully funds “his number” with second economy assets will have peace of mind. He will be assured that his income in future years will not depend on the sale of his business interest. This financial freedom allows the business owner the option of considering a variety of solutions for transitioning his share of the business, none of which would burden the next generation or non-family management with a forced sale. What good is it for Mom and Dad to sell their interest to obtain the highest value if it leaves the next generation struggling to finance their parents’ buyout?

Charles D. Epstein a Principal & Certified Family Business Specialist of Epstein Financial Group in Springfield, MA. (413)734-6418 ~ Email: cdepstein@finsvcs.com

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