How Much Do You Need to Retire?

A typical client comes to us with a range of assets that they accumulated in an ad-hoc fashion over time rather than from the execution of a master plan. Not everyone who is wealthy is financially sophisticated. Often, they were just really good at what they did, whether that was running their construction or earthmoving business or being a great doctor or lawyer.

Most of our clients are not financial experts; if they were they wouldn’t need us. However, they are smart and recognise the importance of seeking the right advice to optimise their position. I’ve had people with tens of millions of dollars asking me if they had enough to retire. As much as it surprises me, it is a great reminder that everyone worries about the same types of things when it comes to retirement:

• How much do we need to retire?

• Do we have enough to retire?

• How long will my money last?

There is not one simple answer because everyone’s situation is different, but these are easy questions to address. In financial terms, the three questions above are all a variation of the same equation, the basic variables of which are income, expenses and capital.

But for the purpose of the general concept, simple numbers are the best place to start. If you require income of $250,000 p.a. to meet your expenses in retirement and a typical investment portfolio produces income of 5% p.a., then you’ll need $5,000,000 in capital.

If you have more capital than this then you’ll be fine. If you have less capital than this then you have a decision to make, and you can either reduce your expenses or you can deplete your capital. There is no right or wrong answer it is up to you. But you need to understand the numbers.

I can’t emphasise enough how important it is to understand the context here and the impact of even the most basic variables. If we change the assumption for the typical investment portfolio in the scenario above to, say, 2.5% p.a., then you’ll need $10,000,000 in capital to generate the income figure of $250,000 p.a.

With regards to dipping into capital in retirement, people tend to fall into two camps; those that are worried about spending any of their capital and those who are more concerned about trying to use it all before they die. My philosophy here takes into account real life, not just the financial side. When you’re 65 maybe you live for another 30 years, maybe you live for 2. But I’ll say this, life is short, and I have not yet seen anyone get healthier and more active as they got older.

The reality is that your first 10 years of retirement are going to be your best, so make the most of it. If you are 65 and have $3,000,000 in capital and you spent $50,000 from your capital to have an amazing holiday every year for 10 years does it matter that at 75 your capital has reduced to $2,500,000? Probably not. What if you don’t make it to age 75?

Obviously, the above scenarios are basic and don’t consider specific circumstances, tax, inflation, and whole range of other variables but the overriding concepts and philosophy still apply. For our clients we complete sophisticated financial models that include a range of assumptions around returns, inflation, tax structures and scenario planning to ensure they are prepared for the future and have peace of mind. Certainly, if the three questions at the start are keeping you up at night then it’s probably time to get that type of advice and start planning properly.

General Advice Disclaimer: This information is of a general nature only and may not be relevant to your particular circumstances. The circumstances of each investor are different, and you should seek advice from an investment adviser who can consider if the strategies and products are right for you. Historical performance is often not a reliable indicator of future performance. You should not rely solely on historical performance to make investment decisions.

Succession

One of the best TV shows I’ve seen in a while is Succession. What the show does really well is explore the issues and power dynamic of a very wealthy family and their business. It highlights how difficult navigating succession within a family business can be. There’s an old adage that family business and wealth is made and lost over 3 generations. The basic concept is that once the wealth is made, the next generation maintains it while the third generation squanders it. Often referred to as ‘shirtsleeves to shirtsleeves in 3 generations’ it’s a cautionary tale that conveys the difficulties families face in managing their wealth and financial success over the very long term. The reality is that planning for succession is a serious topic that is too often neglected until it’s too late. The purpose of succession planning is to make sure that the family wealth passes through the generations and continues to grow. 

There are often tensions as the family patriarch or matriarch gets older, and their adult children rise within the business. It’s important to manage that situation because these issues only become more difficult and more complicated to deal with later if there’s no succession plan in place. By the time the founder passes away it’s all too late. It happens all too often, and the subsequent problems can become an emotional, financial, and legal minefield for the whole family. None of these topics are going to be easy to deal with but it is necessary to work through the issues regardless. 

Addressing these challenges requires careful planning, open and honest communication, and a commitment to the long-term success of the business. Sometimes hard conversations are needed. Seeking external expertise, implementing governance structures, and establishing clear processes can help navigate the difficulties associated with succession planning within a large family business. Obviously, it’s important to avoid any unnecessary bureaucracy but at a certain point, a family grows to a size where it benefits from introducing a more formal process for decision-making than they had in the past. Overwhelmingly, I hear from every family that goes through the process, that they wish they’d done it years earlier.

I had a really great conversation on exactly this topic during my podcast recently with Stu Laundy from Laundy Hotels. These days the family have over 90 venues and a business valued at over $1.5 billion. What was fascinating was Stu’s candour with regard to the real-life struggles that exist within his family as they mapped out the succession plan for the next generation. It’s not easy for the older generation to let go of control and change the way they run the business. What Stu and the family realised and ultimately embraced was that it is critical to have those hard discussions as early as possible because once you do you reap the rewards. So many family businesses can learn from these insights.

You’re not going to avoid conflict in a family business, but you can harness the difficult issues and turn them into a constructive process. These cover a range of topics from the family relationship dynamics, balancing various competencies and skill sets, family Interests, through to the emotional attachment of the founder and how to let go. You also need to ensure fairness and equity for all the family members and the need for the business to evolve and adapt to changing markets and technology. The benefits are significant though and help to safeguard the future prosperity of the business. The planning process helps identify the right people for the right roles and not only educates the successors but develops their talent to ensure a smooth transition and a continuation of the founder’s legacy for generations to come.

General Advice Disclaimer: This information is of a general nature only and may not be relevant to your particular circumstances. The circumstances of each investor are different, and you should seek advice from an investment adviser who can consider if the strategies and products are right for you. Historical performance is often not a reliable indicator of future performance. You should not rely solely on historical performance to make investment decisions.

Setting Up a New Portfolio

As I speak to our clients and podcast guests, I continue to see extraordinary business owners who are fantastic at running their business but who’ve never managed investments before. It’s a completely different ball game and it can be daunting. You need to learn, but who do you learn from? When you don’t know how to do something the most difficult part is working out who does. I strongly recommend reading books by the very best in the world. But even then, investment philosophies vary so greatly that what works for one investor doesn’t necessarily work for another.

The first rule is to keep it simple. If you’ve been successful in business, you know how to bring information together and make decisions based on what makes the most sense. So, keeping it simple means only doing what makes sense to you. Importantly, it means don’t make investments you don’t fully understand because you think the person telling you to do it knows better. No one cares about your money more than you do. So, it’s critical to understand the investment and the rationale behind the advice. Sayings like ‘If it sounds too good to be true it probably is’ might be a cliche but are also true.

Those that sell their business suddenly have a large amount of capital to invest. Ironically, while that kind of generational wealth brings with it security, it also brings a high level of anxiety. Founders are suddenly confronted with the prospect of not only making investment decisions they often haven’t had to make before, but they are also acutely aware that in many cases this money, regardless of how much it is, is all they have. It’s a very different mindset when you transition from a business owner making millions of dollars a year in profits to an investor where the amount you’re investing is the amount you have for the rest of your life.

Whether you have $10m, $100m or $1b to invest, the process is very similar, especially in such volatile times. In these situations, invest slowly over time. Regardless of how great the investment opportunities are or how great they seem, take your time, and invest progressively. This is simple but an important part of mitigating the risk of markets falling substantially after you invest. Of course, it can work the other way too and markets can jump up but in the current situation, there is more risk to the downside than the upside. But when you are setting up your family for generations, taking months or even years to fully invest protects the downside while ensuring you have funds available for opportunities that may arise in unique situations.

From there it’s a matter of structuring your investment portfolio for the long term. Rule number 2 is to diversify your risk. Diversification across asset classes such as property, shares, bonds, and cash are critical. But so too are the underlying investments within each of these sectors. Spread your risk because when one asset class performs poorly, you expect the others to have performed well and offset your losses. While diversification within an asset class is similar, if you hold 20 stocks and you have a couple of poor performers, you’d expect the good performers to mitigate this. At its most basic level, it ensures that if an investment fails you don’t have too much of your portfolio in any one asset.

So, keep it simple and ensure that you understand the investments you make. Don’t make an investment because everyone else seems to be doing great investing in it. This is the dumbest reason to invest, and I’ve seen more people lose money from investing in these ways than anything else. Diversify, across asset classes and then further in specific investments within those asset classes. Average in over time to hedge your timing risk, especially when investment markets are uncertain and overvalued. 

Lastly, you need to be able to sleep at night. That is the final test, can you sleep at night with the investments you have? If you can’t then it’s either because you don’t understand your investment properly or you’ve taken too much risk. Always make sure your investments pass the sleep test.

General Advice Disclaimer: This information is of a general nature only and may not be relevant to your particular circumstances. The circumstances of each investor are different, and you should seek advice from an investment adviser who can consider if the strategies and products are right for you. Historical performance is often not a reliable indicator of future performance. You should not rely solely on historical performance to make investment decisions.

Work, Money and Life

Just back from an overseas trip to Europe with my wife in May hence the mini-break in articles recently. I wrote this list about 2 years ago when we hit a few family milestones, the youngest of our 4 kids turned 18, my wife and I celebrated our 25th wedding anniversary and I was approaching my 45th birthday. Two years later the 22 lessons are just as true as ever. I’ve added many more followers since then, so I thought it was worth resharing.

This is what I want my kids to know about work, money, and life:

1. Make every single day count. There is one thing I know for sure, it’s that time stops for no one. That doesn’t mean be constantly busy or rush. It means be mindful, not wasteful.

2. Do what you love. Everyone says that these days, but people still struggle with it. Do what you really love, and you’ll end up being successful and more importantly, happy.

3. Give it a go. Whatever it is you really want to do, just go and do it. There will never be a perfect time, so don’t overthink it, just do it. If it doesn’t work out, then just start again.

4. Don’t be scared to try new things. If you don’t know what you want to do, try a bunch of things. You’re not going to find your passion thinking about it. Get out there and do.

5. Learn good habits. This goes for work ethic, health and fitness as much as financial discipline. Start off by making it easy and build on it every day until it's unbreakable.

6. Develop a good daily routine. This follows on from good habits. Almost everyone who I’ve seen succeed has a reliable routine. It’s what helps you get through the tough times in life.

7. Choose your partner wisely. It will probably be one of the single biggest factors in the happiness of your life. This applies to love and business.

8. Pick your battles. Don’t get distracted from your goals by everything that goes wrong or every problem that appears. Save your energy for the fights that really matter. 

9. Enjoy the journey of life. It goes quickly and very few times is anything as serious or grave as it may seem. So, stress less and enjoy each day as it comes.

10. Buy books. The best investment you can ever make is to buy a book for $30 to get the insights a world-class expert gained over a lifetime. It remains the best deal I’ve ever seen.

11. Spend less than you make. Always. Save and then invest. Once you build your savings add to your investments regularly. It doesn’t matter if it's shares or property as long as you invest.

12. Credit cards are dumb. Pay cash. If you can’t pay cash, then guess what? You can’t afford it. Only use debt to buy appreciating assets like property and even then, with caution.

13. Start a business when you are young. Whatever it is you want to try once you’ve learned the basics try it. Start small scale and assume you’ll fail. But learn by doing.

14. Turn off notifications. And most social media for that matter. If you don’t consciously turn off from it, you’ll be distracted from your own goals by the barrage of addictive marketing. 

15. Learn about money. Understand the magic of compound interest, the importance of cash flow and how to read a balance sheet. Invest don’t speculate.

16. Learn the power of words. They impact all your relationships, your ability to communicate at every level and negotiate the outcomes you want in life. They matter.

17. Be a lifelong learner. Be curious about the world. Travel and open your mind to other cultures and views. Most importantly never stop learning no matter how old you are.

18. Embrace change. In your everyday life and in the way technology is changing the world. Understanding how the world is changing is one of the most interesting parts of what I do.

19. Take regular holidays and breaks. Spend time with family and rest. I try to take a short mini-break every 3-4 months if I can. Rest, rejuvenate and smell the roses along the way.

20. I assume I’ll die in 10 years. For perspective, it reminds me that life is short and to get on with it, but at the same time, it's far enough away that I’m not too worried about it.

21. The meaning of life. In my younger years, I gave a lot of thought to this and concluded it was a waste of time. There is none. It’s up to us to create whatever we want from our lives.

22. Have fun. Remember to laugh and enjoy every day if you can.

Feel free to share with your kids or grandkids if you think it may provide them with useful insights.

Take the trip, see the show

This might be the best advice I have ever given. To be clear, it’s not the best financial advice but it’s not meant to be. This one is about living life. I see this more than you’d think from very wealthy people concerned about spending money in retirement.

Early on in my career I saw many people who worked so hard to build their future. I saw a few couples who sold their business for millions of dollars to retire only for one of them to die within 12 months. Their dreams and plans for the next phase of their lives turned upside down and all the things they were going to do together were never going to be done

What was all that work for? The future they worked so hard for over decades didn’t exist. So, what was the point? It made me more determined than ever to both succeed and enjoy life along the way. It also heavily influenced my views on how to spend money during both your working years and in retirement.

In my younger years, I was more focused on achieving outcomes. I’d reach a goal and instantly move on to the next one. But as I get older, I realise that it’s the process every day as you work towards your goals is what life is all about. The journey is more important than the destination. That journey includes all the simple things in life such as a family meal together or a walk on the beach, but it also includes the bigger ticket items we tend to put off for too long.

But the same applies once we are older too. If you’re 70 you might have 10–15 years of good health left if you are lucky. That’s often the time when you can still travel and do all the things you want to do in life, but it gets more difficult as you get older. Who knows when our time is up too, so there’s no point in waiting to do things, get on with it and do them.

Part of the issue here is that once people have sold their business and retired, regardless of their level of wealth, they become more conscious that the amount of money they have is what they have for the rest of their life. That can make it especially daunting to dip into your capital in the name of fun or living life. But outside of leaving an inheritance, what else is it for? What were all the years of blood, sweat and tears for?

I’m not suggesting people become frivolous spendthrifts, but I am suggesting that it’s worth crunching the numbers, whatever your financial position, to understand the balance between frugality and living a fulfilled life. Of course, success and happiness are different for everyone and only you know what that means for you and your family. But what I do know for sure is that our time on this earth is limited, and our time with our loved ones is even more limited.

When I hear people in retirement questioning whether they should dip into their capital for a regular overseas holiday, I take the view that there is no better time than now. We don’t get healthier as we get older. I see it as money well spent. So, buy the tickets and see the show, take the overseas trip because it might just create some of the greatest times and best memories of your life.

General Advice Disclaimer: This information is of a general nature only and may not be relevant to your particular circumstances. The circumstances of each investor are different, and you should seek advice from an investment adviser who can consider if the strategies and products are right for you. Historical performance is often not a reliable indicator of future performance. You should not rely solely on historical performance to make investment decisions.

The Earn-Out Phase

Over the years as I speak with clients and more recently, the business owners I have interviewed on my podcast, it is clear one aspect of selling a business is tougher than most would expect. Specifically, the transition phase whereby the founders complete their ‘earn-out’. When a business is sold, there are usually 3 components made as payment, cash, stock and an earn-out. The cash is the amount of the business you sell for dollars in the bank. The stock is the shares in the new entity you receive, often a much bigger listed company. The earn-out phase is a period after the business is sold, after which the seller receives additional payments in exchange for assisting with the transition of the business to the new ownership. Typically lasting up to three years, the earn-out phase incentivises the seller to work towards agreed-upon objectives and performance targets being met to earn a bonus payment.  

The earn-out is an extremely important part of the deal but is sometimes overlooked or at the very least not given the level of consideration by founders as it warrants. After the initial excitement of being acquired for millions, reality soon hits because how the earnout phase is set up and who you have sold the business to is going to impact your life in a big way for the next three years. While many people are willing to endure discomfort for three years when a large cheque is on the table, it is worth taking the time to plan and negotiate the earn-out terms. It is especially important to consider how the next few years may play out if things don’t go well. It could be because of targets being missed, personality clashes or simply tough economic times but you’ve got to consider the downsides. 

The comment I hear the most is that you lose two things that are more important to entrepreneurs than anyone else, autonomy, and time. So be aware that you have handed over ‘your baby’ and you are not in control of the decisions anymore. Other people are in charge and they will not run the business the same way you did. Your business will be part of a larger organisation with a hierarchy that slows everything down. No longer can you decide on a marketing campaign in an afternoon based on your gut instincts based on 20 years of business. Now those are group decisions that must go by the head of marketing for approval. But they will need to run it by legal for approval and so on. Be aware that is just how it will work going forward.  

The reality is that you’re going to experience significant change in the transition phase. More so than anyone else in the business. The greater the percentage of the business you retain, the more important it will be for you to have a level of control. Most importantly you need to prepare yourself psychologically that the business is no longer yours. The new owners will probably drive you insane at times and make decisions that make no sense to you at all. So, you need to be mentally prepared for this because they may very well take your years of blood, sweat, and tears and mess it all up. It might turn out great too and everyone will live happily ever after, but do not underestimate the earn-out phase and the impact it will have on your life for those few years.

General Advice Disclaimer: This information is of a general nature only and may not be relevant to your particular circumstances. The circumstances of each investor are different, and you should seek advice from an investment adviser who can consider if the strategies and products are right for you. Historical performance is often not a reliable indicator of future performance. You should not rely solely on historical performance to make investment decisions.