Can You Really Retire Early?
Ernie Neve, CPA
September 1, 2020
Of all the questions I get from business owners, the one that always seems to creep up – eventually – is about retirement.
Entrepreneurs today all seem to realize that small businesses are the ones driving innovation, and those with truly world-changing systems and processes are going to be purchased by larger companies.
At the same time, long-time employees are often “bought out” with early retirement plans offering six- and seven-figures to simply pack up and retire.
So how can you effectively calculate how much you need? Is there a “magic” number?
Well, there actually are several you need to consider, so let’s think about that a little bit…
First things first, interest rates are not going to get back to where they once were anytime soon, so the idea of more than a 4% gain on many investments is simply not going to happen like it once did for our parents. Yes, there are plenty of “risky” investments you can make, but the security of money in the bank is (legitimately) more important than having to go back to work, right?
So you need to do some calculating!
First things first, you need to understand how much you spend each month – and frankly,
most of us don’t. the advice I usually give is this: average the withdrawals from every bank account over the last 24 months.
My guess is you’ll be shocked at how much you really spend each month, nearly everyone I ask to do this simple exercise is. The next step is harder: you have to realize that is what you spent. Period. Don’t try to explain it away, you need to embrace it!
It is what it is, and the reality of those expenses is they aren’t likely to change all that much. If you enjoyed going to dinner three times a week or vacationing twice a year, those habits aren’t likely to change.
Even if they did, the actual “savings” we’d be talking about are really just a small drop in a big bucket.
The next number you need to look for is how you’ll be receiving that money – is it a one-time payout? A payout over a certain number of years? Is it going to an LLC (and how is that taxed) or to you personally?
Each one of these has a different process for being taxed, and the worst of all would be a big check cut to you, personally. At least half of it is simply going away to the taxman. This is where strategy comes into play, so before you simply take the money and run, let’s have a call to discuss how you can keep more of it.
These are just the tips of the iceberg – there are plenty of other numbers to consider: when to actually take Social Security benefits, healthcare costs, and even how you’re taxed (your income can impact how taking money from a 401(k) or an IRA will be taxed - as well as your age.)
There are a ton of different ways to look at a buyout package, and many of them are directly related to the planning you do before you make the deal. In the case of a business sale, you have an almost endless variety of ways to structure your compensation, so take your time, sit down with me and the team, and let’s get the planning together!