How Much Money Do I Need To Retire?

by Dave Driscoll

I hear this question all the time. I am not a financial adviser and I would defer to one in a heartbeat, yet I am a business owner, a baby boomer and someone who is planning on a retirement of my design, with enough income to support my chosen lifestyle – just like you.
Most business owners have probably done a pretty poor job of planning their finances in support of retirement; they’ve been busy growing and managing the business. The fact is that 65% to 90% of an owner’s personal worth is represented in the value of his/her business.

So the question becomes: How much money (after tax) do you need to sustain the lifestyle of your choice?

There was a rule of thumb in the 1990s (the good years) that a 4% pull off a well-diversified portfolio would last 30 years. But what about in 2014? With low interest rates, market risk and increasing life expectancies, what’s the number? Well, if your money earns less and you need to take on more risk for higher returns, the number certainly could be something different than 4%. You and your financial adviser should decide what percent is right for your situation, yet we will stick with the 4% from the 90s for my demonstration.

Let’s run some numbers.

Suppose you and your financial adviser have determined you need to pull/receive $6,000 cash per month from all sources to sustain your current lifestyle into retirement. 

At age 66 you are eligible to receive $2,000 in Social Security benefits, so the remaining $4,000 cash per month must come from other sources, meaning personal savings and investments in addition to the value received from the sale or transfer (to a family member or employee) of your business. Perhaps $1,000 per month can come from savings/investments other than your business, leaving $3,000 per month needed from the after-tax proceeds of the sale/transfer of your business.

Let’s add this up to find out how much you need to sell your business for to continue your lifestyle (assume all numbers are after-tax): How much money do you need invested to pull 4% from a well-diversified investment portfolio to achieve this after-tax income? Assuming an income tax rate of 25% -- 2014 taxable income, married filing jointly:

Amount in personal saving and investments:
$400,000
Business – net from sale of business: $1,200,000

Total invested capital necessary: $1,600,000

To achieve $1.2 million in investable capital from the sale of the business, the business would need to sell for approximately $2 million as an asset sale, S corporation at a 39.6% federal tax rate. State tax is additional.

Fellow business owners: We have worked hard, taken the risks and endured the headaches. Not being able to continue the lifestyle we have created is not acceptable.

If you don’t know the current market value of your business, find out with a valuation! If that value doesn’t meet the minimum necessary to continue your lifestyle into retirement, take action now to improve the business value and meet your objective – you owe it to yourself and your family!

Dave Driscoll is president of Metro Business Advisors, a mergers and acquisitions, valuation, and exit/succession planning firm helping owners of companies with revenue up to $15 million sell their most valuable asset. Reach him at DDriscoll@MetroBusinessAdvisors.com or 314-303-5600. For more information, visit www.MetroBusinessAdvisors.com.