When can you afford to retire? 

At some point we all want to retire from our business so it’s important to understand how that will impact on our future income. For me, this starts with a personal balance sheet.  

Whilst there’s no financial reporting standard for this here are the sort of things that I include: 

  • Sale value of your business less any costs of sale and capital gains tax 
  • Property less outstanding mortgages, costs of sale and capital gains tax 
  • Pension funds 
  • Other investments 
  • Long term savings 
  • I exclude short terms savings and current accounts as these are usually less substantial and they probably need to be maintained into retirement. 

I then look at a forecast of personal income and outgoings.  

Income might include 

  • Salary and dividends from your own business 
  • Pension income 
  • Rental income 
  • Other investment income 
  • Sale of assets (which might reduce income that those assets generate) 
  • Gifts and inheritances 

And outgoings would be your household bills, hobbies, holidays, etc 

When doing a long terms forecast these will change over time as you plan in major life events such as buying property, weddings, children, school fees, sale of property, cashing in some of the investments above, retirement homes, crises and even nursing homes.  

As with any long range forecast there are huge assumptions to be made, your date of death being one of them, but it is a good start on when you can afford to retire and what sort of lifestyle you will be able to achieve. 

Also worth mentioning that you should ensure that you have a valid will, and power of attorney for your finances, health and business. 

Retirement planning

No matter what age you are it is still worth thinking about how you will save for your retirement. And I don’t just mean saving your teeth.

There are 3 main ways that your business can fund your retirement:

1. Increase value of business for sale

If you have a valuable business this can be sold at the point of retirement to fund your new lifestyle. Your business value will increase if it is highly systemised and not dependent on you.

2. Systemise your business for residual income

If your business is highly systemised you can step out of it or just reduce your hours and still have a generous income. Whilst we often coach accountants and business owners who want to sell up, two of them have been so pleased with the process that they have actually decided not to sell yet as the revamped business operates so smoothly and takes less of their time. It’s a bit like doing up your house for sale and then deciding that you like it so much that you won’t move after all.

3. Increase profits to invest elsewhere

Some businesses have limited sale value as they will always be dependent on the expertise of the owner. In this case it makes more sense to increase your profits to invest elsewhere. Your company can pay into a third party pension scheme or SIPP very tax efficiently or you may prefer to take your profits out now, pay the tax and invest in property.

Whichever way you choose to fund or retirement, and whether you use us to help you to improve your business or not, please remember to take care of your teeth.