It’s not your imagination, it really is trickier!
If you’re a business owner starting to contemplate retiring someday, you may be feeling like this is really hard to figure out. It’s not your imagination! As a business owner, retirement planning is different for you than it is for other non-business owners. Not only do you have to figure out all the same difficult retirement planning questions that everyone else has to figure out, but you have a couple of really big challenges that are unique to you as a business owner.
In the category of “retirement planning for everybody” you’ve got all the issues that everyone has to figure out when preparing to retire. First up is you will need to be able to answer the question “how much will I need to retire?”. There are several things you’ll have to figure out in order to answer that question.
First you’ll have to figure out how much retirement is going to cost. That means getting your arms around how much you’re currently spending to live your life. It may also mean layering on some additional expenses for the life you want. That may include things you’d still like to do, but haven’t had the time or money to do yet.This could be things like travel, spending time with the people you care about, or spending more time pursuing hobbies. It might also mean making some adjustments for things in your life that will be less expensive. An example of that would be moving to a place with a lower cost of living. Taking all of this in to consideration is the first step in figuring out how much retirement is going to cost.
When you have an idea of how much it costs today, you then have to make some assumptions about how much it will cost in the future. Recently we’ve been in a period where inflation levels are at historically low levels. How long will that continue? Do you want to plan on that staying this way for the next 30 or 40 years, or do you want to prepare for the possibility that inflation could go up in the future and that the cost of everything you buy will be going up too? Inflation is one of the huge retirement risks people face and figuring out a reasonable assumption is critical to your preparation.
The next step is to try and figure out how long you’re going to be retired. That’s really a tough one, but far too many people underestimate how long they’ll be around. That can be a big problem because I’m pretty sure nobody wants to run out of money before they run out of time! While there are some obvious factors that may limit how long your retirement will be (i.e. smoking) for most people it’s a mix of things and may include family health histories, personal health histories, and one of the biggest gray areas, the pace of medical advancements. The reality is that people on average are living longer than ever. How long will you live? There are some great tools out there to help you get a good estimate.
So now that you’ve got a sense of how much it’s going to cost, and how long retirement might last, you need to figure out how you’re going to pay for it. What financial resources have you accumulated so far? What kind of growth or income do you think those will throw off in the future? Will that be enough? This is another place where you’re going to have to make some assumptions, and it’s a particularly tricky thing to do right now. Currently we find ourselves in a pretty unique time in history when interest rates are really low, meaning “safe” investments like savings and bonds are paying next to nothing. Pair that with the fact that the stock market is currently trading at levels that are on the high end of their historical averages. One of the fundamentals of investing is “buy low, sell high” so when everything is selling “high” it doesn’t bode well for future returns. So the stuff that’s supposed to be safe isn’t paying anything, and the stuff that’s supposed to provide the growth is looking pricey. What is a reasonable expectation for how much growth and income will be available to pay for your retirement? Figuring that out will be key to your peace of mind.
These are the fundamental questions everyone needs to figure out when planning for retirement. In my next article, I’ll talk about some of the unique challenges business owners face, in addition to the “normal” things everyone has to figure out when planning for retirement.
