This past week, I was working with a couple, Susan and Robert, who is sorting through their business succession plans. Their story is a quite common one. Rob has built a modest company that has met the needs of his family and his employees. Several of their children work in the company and have for most, if not all, of their adult life. Rob designed the policies for the company with family as a high priority. While profitability was important, driving meaningful growth in the company and its value has never been on their radar. Now, it’s time to decide whether to sell the company on to the kids or to an outside party. Their wish is for it to stay in the family. But wishes don’t always come true.
Allianz Life, a financial services company, routinely conducts research to measure how folks are feeling about their financial security. One of the interesting findings is that 63% of non-retirees fear running out of money more than they fear death. Further, pre-retirees have less confidence than they did a year ago about their ability to financially support their future goals. Last year, ¾ of the respondents were confident. This year, it’s down to 68%.
With good reason. According to other financial services companies’ research, the average retirement savings in US for 65+ 280k with a median of 88k. Mass Mutual reported in their 2022 Business Owners Perspective report that 65% of business owners have less than $500k saved for retirement. Rob and Sue fall into this category.
That scares me. Between those levels of savings and whatever may be available to them through Social Security, those resources may not be enough to pay for housing, Medicare coverage, health care expenses including deductibles and out-of-pockets, taxes on the withdrawals from 401(k) savings, food, emergencies and home repairs, clothing, and transportation. Most retirees want to dedicate some funds to family, entertainment, and travel. And then there is the greatest siphon, needs for long term care.
Inflation is further threatening retirees’ and near-retirees’ financial security. For the last 12 months ending August, inflation was at 8.3%. It was as high as 9.1% in June. Inflation hasn’t been this high in 40 years – 1981. We’re more accustomed to 2-3%. Medical inflation rates are at about 5%.
With rising housing, gas and food prices, there is less available to save. For those already retired and living on fixed incomes and savings, their pool of resources is being spent fast than they ever imagined. And then there’s the fun in the stock market these days, especially if you are forced to book the losses and take the minimum required distributions from the IRA/401(k) accounts.
And it all feels out of our control.
So what should Sue and Rob, and others in a similar situation do?
Reality is that it is not out of your control. There are some tough-love things you can do.
Step One: Stop Ignoring Your Long-term Financial Wellbeing
Our culture is one that prioritizes the here and now and immediate gratification. We’re bombarded with media and advertising aimed at convincing us that we can have it all. All you need to do is pull out your credit card and it’s yours.
Simultaneously, our wallets are being emptied with the current inflationary dynamics brought on by the Pandemic, supply chain shortages, and opportunistic pricing. Making ends meet is more challenging than it was even a year ago.
By focusing on the current day challenges, we delay saving and thinking about our long-term financial wellbeing, particularly if retirement is years away.
But years fly by. Before you know it, our capacity and/or capability to earn money is diminished. You’re no longer accumulating money. It’s now time to live on what you have accumulated.
We know that we can’t arrive at the gym and expect to perform well if we haven’t gotten off the couch in three years. The same is true when it comes to saving for retirement. If we haven’t saved enough to push through that last lap, we’re going to run out of gas.
Today is a good day to start fresh.
Have the conversation with yourself and then with your family. Consider adjustments that you can make to your spending and savings patterns. Small changes, from adjusting your 401(k) saving amount up a smidge to get the match, setting up your paycheck to go part into checking and part into savings, and considering alternative ways to get to work all make a difference.
Step Two: Develop or Update Your Financial Plan
Sue and Rob have never worked with a financial advisor. Our conversations fortunately spurred them to seek someone out to start modeling their financial situation. They provided key bits of information to the advisor, including, but not limited to:
The advisor is able to put this information into a financial planning modeling tool and forecast the adequacy of their resources throughout their lifetimes. This is a powerful experience for everyone I have ever witnessed going through it. Even when shortfalls are identified, there is a sense of calm that comes in seeing the results in black and white. It provides clarity where there has been only fog and cloudy skies.
Step Three: Challenge the Assumptions in the Financial Plan Model
Most financial planning models have a number of assumptions that are integrated into the calculations, including:
Each of these assumptions can be modified. Don’t be afraid to ask what they are and challenge them. If a setting doesn’t feel appropriate, talk it out.
Scenarios can also be developed so you and the advisor can forecast the potential outcome. This is particularly helpful for business owners wanting to model out potential exit options. For example, Sue and Rob’s model initially left the value of the company out of the model. The shortfall was startling to them. Gifting immediately came off the table as an option. If the kids wanted to buy shares, the model also showed that Sue and Rob didn’t have much wiggle room to discount the price to the kids and maintain their lifestyle and independence.
Step Four: Put the Plan into Action
Planning is a powerful tool for changing the way you think in a particular situation. There is even greater power when you use it to drive change and act. Decisions we make every day, even the smallest ones, have consequences. Something as small as contributing to your 401(k) up to the maximum match of the employer or putting 10% of every paycheck into a savings account every payday adds up over time.
For Sue and Rob, they will be taking a dual approach. In addition to managing their personal finances, they now realize that their real nest egg is in the sale of the company. They started enough ahead of time, before their target retirement dates, so they have time to make improvements to the business that could improve it’s purchase price. Time is of the essence.
Consider adapting these steps to your own situation. Enhance your own financial acumen, seek out a financial planning advisor, and put a plan into action.
Not everyone has access to a financial advisor. Don’t let that stop you. If you or your spouse have access to a 401(k) or retirement plan at work, take advantage of it. Very often, the firm that your company uses to manage the 401(k) plan will offer free sessions with their advisors. Take advantage of that resource. Work with them to help build a basic model. Go to your local bank or credit union - many offer personal financial resources that may help you get started.
That’s the priority.
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