Throughout life, we encounter a number of “financial impact points” — pivotal events with the potential to make our dreams come true, say financial advisors Chris Snyder and Haitham “Hutch” Ashoo, co-authors of “Exiting Strategies: The CEO’s Seven Critical Steps To Cashing-Out of a Business, Managing and Preserving Wealth.”
“The sale of a business or real estate is one of those,” says Chris Snyder, co-founder with Ashoo of Pillar Wealth Management, (www.pillarwm.com). “With the right planning, it can become your ideal retirement.”
Unfortunately, sellers often make fundamental mistakes: They underestimate how much money they’ll need for their retirement; they overvalue their business or property; and they often fail to properly invest the proceeds in a diversified portfolio of equities, bonds and money markets for income.
How can you turn your business or property sale into your ideal retirement? Snyder and Ashoo offer these tips:
1. Determine the retirement lifestyle you desire, and how much money it will cost.
If you don’t know how much money you’ll need, you can’t identify how much you need to net from the sale, Ashoo says. “How many homes will you have? Do you see yourself traveling? Creating a charitable organization?”
Create a detailed list. How much money will it cost you each year? If you retire at 55 or 65, odds are good you’ll enjoy a 30- to 40-year retirement. How much will you need for that length of time?
“When you meet with your wealth manager, insist on running that number through 1,000 different ‘launch’ scenarios – what we call a ‘space shuttle’ analysis – to test whether it will meet your expenses under a wide variety of market and world conditions,” Ashoo says.
“You can’t rely on an Excel sheet analysis based on fixed rates of return and fixed expenses for the rest of your life. It’s a sure way to financial disaster because there’s no such thing as zero risk.”
2. Get an objective valuation of your business or real estate.
Very often, Snyder says, he and Ashoo work with clients who have a vastly inflated idea of how much their business or property is worth. When they decide to sell, they either can’t because no one will pay what they’re asking, or they get far less than they expected.
“People often attach an emotional value to the asset, particularly a business or legacy real estate,” Snyder says. “Hire a merger and acquisition professional to provide you with a real market valuation for your business, or a real estate appraiser to do the same for property.”
If the value isn’t where it needs to be, you may need to make some lifestyle changes or hold onto the asset longer.
Another caution: “If you performed step 1 thoroughly and you are confident you need $15 million for your retirement and someone offers you $20 million, take it,” Ashoo advises. “Don’t hold out for $23 million just because you think that’s what it’s worth.”
3. Invest the proceeds prudently and in a way that will generate income.
Once your real estate or business is sold, you need to build a diversified portfolio of equity, bonds and money markets that will balance your risk and generate an income, Snyder says.
“Modern portfolio theory holds that 93 percent of the return on your investment is based on your mix of these asset classes,” he says’¨Adds Ashoo: “But prudent investing entails not accepting more risk than is required to achieve your retirement lifestyle.” Don’t rely on a simple risk questionnaire to make that determination for you, the two say.
Again, have your wealth manager run your portfolio through a “space shuttle’’ analysis to test how it will perform under many different conditions.