Retirement: How much is enough?

Retirement: How much is enough?

Address business succession decisions before tackling estate planning

In 1972 four aspiring MBAs engaged in an interesting debate: "What would our net worth need to be at age 65 if our goal was to be the equivalent of a millionaire in 1972?"

In addition to our studies, the four of us taught undergraduate classes in business calculus, statistics and computer programming for a whopping $2.65 an hour. Starting salary for a typical MBA graduate was $15,000 to $20,000. Millionaires were associated with homes on golf courses, destination resort vacations, lake cabins, sailboats, yachts, luxury cars, etc.

For business succession, a good starting point is holding a family meeting to solicit goals, then define challenges and decisions that need to be made says rancher and financial consultant Dick Wittman.

To answer the hypothetical question, we assumed 6% inflation — the going rate for several years in that era — and came up with $33 million! (You can compute this by compounding $1 at 6% annual growth rate for 42 years).

Having recently passed the age 65 milestone, I humbly admit I'm not a millionaire by 1972 standards, nor are many of my peers.

Why is the question above important? With the average age of farmers in the late 50s, many are trying to sort out how to approach both business transition planning and personal retirement planning. A husband-wife estate today can be only one-third of a 1972 equivalent millionaire and still be threatened with estate tax.

Have we created a business that is worth passing on? Do we have successors who want to work in or own the business? Or should we sell out and exit, as some farmers are now doing with the collapse in grain prices?

If we have successors interested in continuing our legacy, do they have the skill sets, shared vision and capacity to manage the capital required to keep this business viable?

What wealth do we need to be financially secure in our final years? Do we have sufficient wealth to pass on to heirs? How should we manage the wealth we have today? How much is excess to our needs? Do we transfer now, at death, or just wait until we pass and let the heirs fight over what's left?

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Answering the questions
It's best to answer the first two sets of questions before moving on to the latter. Consider the question about how much we need to live comfortably. This would be easy if we didn't have to move off the farm, we knew our lifespan, we could guarantee we won't experience major health care expenses, and we have clearly defined post retirement cash flows not dependent on liquidation of the family business.

The reality is many transitions involve moving off the farm. Health expenses have to be planned for. Oftentimes, a majority of our wealth is tied up in the farm business, requiring liquidation of assets or extraction of income from the business to provide retirement cash flow.

By now you're wondering what does all this stuff about succession have to do with the article's title? A lot! Too many folks start with estate and personal financial planning, without first addressing business succession. If most of your wealth is tied up in the business, doesn't it make sense to engage those closest to you first to decide whether or not the business is to continue, and how? Then personal estate planning strategies can be sought that maximize goals for both business continuity and personal retirement.

A good starting point is holding a family meeting to solicit goals, and define challenges and decisions that need to be made. It's an opportunity to explain the landscape for how the family will tackle the difficult questions above. It's also a time to educate your children on the nature of your wealth, how it was accumulated, and the legacy of family values you hope to pass on in addition to a potential career and ownership in agriculture.

The question of "How much is enough to retire in comfort?" is elusive. A number of tools can walk methodically through financial planning scenarios. Prepare a pre- vs. post-retirement cash flow budget, outlining where your income has come in the past and possible flows of revenue after retirement. I've facilitated many transitions where the fear of living like a pauper was erased once this step was completed.

The fear of the unknown for many approaching retirement is often worse than the reality. The cure is defining the critical questions to ask, pursuing an orderly process of information discovery about where you are, and looking at potential future scenarios.

Wittman, a contributing editor, is a farm management consultant and rancher in Idaho.

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