No business owner should go through life without a plan, and this includes life after business. After tracking down retirement experts and hearing what they had to say, here are their top three tips for planning retirement:
1. Budget as soon as possible
Claire Mackay, principal advisor at Quantum Financial Services Australia, says that it is never too early or too late for business owners to start thinking about retirement planning.
“I've seen the children and grandchildren of my clients when they first finish university or their trade qualification, and it's all about great habits starting early,” Claire tells My Business’ sister publication nestegg.com.au.
“I've [also] had clients come to me six months before retirement. Obviously, there's only so much I can do, but it's better to get planning and advise then than never.”
After showing an interest for retirement planning, Claire suggests the most important thing for business owners to do is to start budgeting, and to do it as soon as possible.
“For a lot of people, that's literally the first step,” Claire says.
“No matter how old you are, no matter how wealthy you are, knowing how much you spend and how much you're saving, to be able to invest, is absolutely critical.
“Those basic things that are absolutely critical, I look at my really successful, wealthy retiree clients, they all know where their money goes.”
2. Plan for a steady cash flow
While every business owner knows of the importance of cash flow for their business, it is also important to keep cash flow steady while planning for retirement to make sure it lasts for as long as possible, according to Firefly Wealth managing director Adele Martin.
“Often, I see people not factoring in that you could actually live 30 or more years post-retirement. Outliving your money is a real risk that you need to be aware of, especially as we have more advances in technology,” Adele says.
“Another big mistake is not protecting your short-term expenses. You need to be aware of the impact of share market fluctuation on your income.”
“I like to ensure that clients have at least one to three years of their income needs in cash, so if another GFC happens, they can still retire and live off the cash, providing them a cushion while they wait for their growth assets to recover.”
3. Take risk into account
Even the best laid plans can fall away if something unexpected arises. Therefore, Craig McCulloch, principal and head of analytics at Milliman, suggests trying to consider as much risk as possible when planning for retirement.
“Retirement is a more complex period than accumulation, and retirees face many risks,” Craig says.
“Members have vast differences in their capacity to accept risk (often depending on the size of their retirement savings relative to their needs) as well as how willing they are to accept risk – the more familiar concept of risk tolerance.”
Craig says the following risks need to be considered:
- The variability of their retirement time horizons, and how various forms of inflation might affect their needs over time;
- Longevity risks;
- Investment risks, in particular balancing the need for growth with sequencing risks introduced during retirement drawdown;
- Flexibility risks: retirees’ health needs and personal circumstances can fluctuate wildly without the natural shock-absorbing capacity afforded by time in the workforce; and
- Expectation risks: managing the risk that your income is too low, doesn’t last as long as expected, or doesn’t meet your level of certainty.