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Richard Fields - Integrated Advisory Services - Winston-Salem, NC

110 Oakwood Drive, Suite 550, Winston-Salem, NC 27103


Successful Exit Planning:  Part #3

Successful Exit Planning: Part #3

| November 13, 2017
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We have already addressed the first two critical questions from the “All We Want Are the Facts” Exit Planning Questionnaire:

  1. What amount of annual, pre-tax post-exit income will you need after you exit?
  2. What is the joint life expectancy of you and your spouse?

As we did for those two questions, let’s look at the common assumptions owners make when answering the third question, and then look at which facts are required to answer it.

Question 3. What is an appropriate withdrawal rate from your post-exit investment portfolio?

“I expect to withdraw money from my investment portfolio at the rate of ________% per year.”

Common Assumptions: Most owners believe that 7 or 8% is a realistic amount to take out per year. However, many experienced financial planners and the financial-planning industry say that number is far too high.

All We Want Are the Facts: When owners overestimate the rate of return on their income-producing assets, they lower their estimates of the total proceeds they need from the sale (or transfer) of their business ownership. This can lead owners to decide to exit too soon, which almost always leads to them running out of money during their lifetimes, or being forced to reduce their desired lifestyle.

It’s easy for business owners to confuse the investment return they expect on their investments with the withdrawal rate from those investments. The financial industry has long used a 4% withdrawal rate as a reasonably safe rate. This rate partially accounts for typical upswings and downturns in annual investment returns. However, some advisors have recently begun challenging that rate as too high, recommending even lower rates, such as 3%. The withdrawal rate is calculated by determining which amount—as a percentage of the assets available on the owner’s targeted exit date, adjusting for inflation—will be sustainable for the owner’s and his or her spouse’s lifetimes.

Source of Accurate Information: A financial planner can fine-tune the business owner’s withdrawal rate based on age, health, Social Security benefits, and other factors. It makes sense to get expert financial-planning advice at the outset of Exit Planning.

In my next note, we will continue our fact finding by answering the intriguing Question 4, “What is your business worth?”


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