Finance & Grow Your New Business. Angie Mohr

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СКАЧАТЬ your financial and retirement goals.

      Case Study

      Craig and Marnie discussed the implications of being business owners. Craig was looking forward to the adventure but Marnie had some reservations.

      “We still have so much credit card debt. I doubt the bank will lend us the money we need to buy into this business.”

      “Why don’t we go talk to the bank about consolidating our credit cards?” said Craig. “We have some equity in the house that we’re not using so maybe the bank can help us out.”

      The next day, Craig met with his accountant, Vivian. Vivian confirmed Marnie’s suspicions that they needed to re-arrange some of their personal finances before they could approach a bank or another lender for funding to purchase the business.

      Vivian recommended that they increase their mortgage to be able to pay off their revolving debt, namely, their credit cards.

      “Lowering your revolving debt will increase your credit score,” Vivian said, “and that will make a bank more likely to lend you some of the capital you will need to invest in this business.”

      Craig was more confident than ever that he was going to be able to buy into this business, but Vivian brought up some other issues that he hadn’t thought about.

      “What will happen if you can’t work in the business? How will you support Marnie and the baby?” Vivian asked.

      Craig hadn’t thought about this before. He scheduled an appointment for the next day with his insurance agent to ensure that he would have adequate coverage for any adversity that may arise.

      Your Retirement Goals

      So you’ve decided to jump into the role of entrepreneur. You have fantastic vision and insight and are looking forward to managing and growing your business for a long time to come. Have you thought about what happens then? Do you still plan on coming into the office every day at 9 a.m. when you’re 60? 70? How about 90? Most likely, you have at least a vague concept of what you want to do when you’re older. You may even have decided that you want to make enough money in your business to retire when you’re 40 or 50.

      Analyzing your retirement goals involves more than just vague concepts. It is the basis for your business and personal financial plans. If you’re planning that your business will provide you a steady income for your working life and then a small gain on sale when you sell, you need to ensure that these funds will be sufficient to meet your financial needs when you retire, otherwise, you’ll need to keep working longer than you had anticipated.

      The minimum financial goal for your retirement is to be financially independent. Financial independence means that you will be able to live off your financial capital for the rest of your life without working, if you wish.

      Let’s look at an example to illustrate how this works. We will walk through a simple example, which will exclude some complexities that exist in real life, like the impact of taxes and income from other sources such as pensions. When you are making your retirement calculations, I highly recommend that you do so with the assistance of your accountant or independent financial adviser (by independent, I mean someone who doesn’t make commissions from the products he or she sells you).

      Start by getting a handle on how much income you need per year to live on after you have retired. Keep in mind that you will have (hopefully!) no debt or mortgage payment and that your assets will be owned free and clear. You will simply have your ongoing living expenses (e.g., property taxes, utilities, food, clothing, medical) and any money that you need to carry out your retirement dreams, such as travel costs. Your post-retirement income needs are likely to be much lower than your current ones. Let’s say that you have decided that you want to have $50,000 per year to live on when you retire. You are 35 right now and plan on retiring when you are 60. Therefore you have 25 years to save for your retirement. You want to make sure that you are being conservative and plan to live until you are 90 years old, so you will need the $50,000 per year for 30 years. You have life insurance and therefore have no need to have any cash left at death. There are two questions that need to be answered mathematically:

      • How much will you need to have saved by the time you are 60 in order to meet your income requirements? and

      • How much will you have to put into your retirement fund each year between now and age 60 to have that amount available?

      We will use a 6 percent average return for our calculations.

      How much will you need at age 60?

      This is simply a mathematical calculation that involves the present value of an annuity. To calculate, you multiply the annual income required ($50,000) by the appropriate factor. Multiplying by this factor takes into account the fact that future dollars are not worth as much as today’s dollars. At an interest rate of 6 percent and 30 annual periods, the factor is 13.765. Therefore, the amount that you need to have in retirement savings by the time you are 60 is $50,000 x 13.765 = $688,250. In most cases, this won’t have to come solely from savings. You may have pension income from a job or a 401K. Your business will also likely have a value when you sell it to retire. Be careful about making these assumptions too rosy in case they don’t happen. In this scenario, we will assume that the entire retirement fund is coming from savings.

      How much do you have to put away between now and retirement?

      You know that you will need $688,250 by the time you turn 60. You have 25 years to save that amount (at an assumed 6 percent rate of return). How much will you have to sock away every year to meet your goal? Again, the formula is simple mathematics. We now use the future value of an annuity to calculate the payments. Using a 6 percent interest rate and 25 periods, the factor is 54.865. You divide the required retirement fund amount by the factor to come up with the annual payments into the fund. In this case, it is $688,250 ÷ 54.865 = $12,544 per year that you will have to tuck into your retirement fund in order to meet your retirement goals.

      So, why is this information important to you now, when you are starting up your business? It’s important when you set your business financial goals. You now know that if you want to meet your personal retirement goals, you will have to draw enough from your business not only to cover your current living expenses, but also an extra $12,544 per year to fund your retirement. Many small-business owners have retirement goals that are at odds with what they are making from their businesses. The earlier you integrate these goals, the more likely you will achieve them.

      The Concept of Net Wealth

      How much are you really worth? You may be drawing a large salary from your business but if it all gets spent on current expenses, it doesn’t add to the value of your possessions. One of the most important measures in your personal financial planning is your net wealth. This is simply your assets minus your liabilities. Over time, your assets should grow and your liabilities should decrease, which decreases the risks you are exposed to and increases your financial stability. Ultimately, your net wealth is what you have to live on and then to pass on to the next generation.

      It doesn’t have to be onerous to track your net wealth. You can simply write down your best estimate of the value of all of your assets and then the payout amount of all of your liabilities (i.e., the amount of money it would take to settle up your debts). You may also choose to use a software program that will track not only your net wealth but also СКАЧАТЬ