Financial planning vs. retirement planning – understanding the differences

Financial planning and retirement planning are often used synonymously, but they are in fact quite different. For business owners who are thinking about retirement, it’s imperative that you understand the differences between these two disciplines and why they are both critical when planning for your exit.

An article in Forbes explains the key differences:

“A financial plan is designed to focus on the accumulation phase of the work-life cycle, to make sure you have a general, but realistic, target of how much you’ll need after work stops. It also helps ensure that you’re saving and investing enough to hit that target when you do retire.

By comparison, a retirement financial plan is designed to focus in detail on expenses after the paycheck stops and how your various assets can generate an income stream that will cover those costs for the rest of your life.”

Another article explains the difference as similar to the differences between family practice medicine and cardiology. These physicians start off with the same basic training, but cardiologists have additional, specialized training, and: “Just like your heart, you need your retirement money to last the rest of your life; if there was ever a time to find a specialist, this is it.”

Retirement Planning for Business Owners

Specialized retirement planning is even more crucial for owners because their businesses are usually their largest assets – many owners have as much as 80% or 90% of their net worth tied up in these illiquid investments! And if you are like most business owners, you may not realize just how much money you will need to net from your sale, after taxes and fees, to fund your retirement lifestyle and achieve your long-term financial goals.

Calculating Your Wealth Gap

Tallying up what you have saved outside of your business and determining how much money you will need in your portfolio after exiting your business is a very important step. The difference between the two numbers is your Wealth Gap or how much you will need to get out of your business exit to sustain your lifestyle going forward. You want to ensure that your money outlives you, not vice versa.

Steps to determine your Wealth Gap include:

  1. Taking stock of the assets you have saved outside your business (your Net Worth),
  2. Determining how much income you’ll need post-transition, and
  3. Calculating how much money you’ll need to net from your business transition (your Wealth Gap) to fund the rest of your life.

Getting Out of Piggy Bank Mode

One exercise that almost always takes owners by surprise is finding out just how much they take from their businesses in the form of salaries, benefits, and perks. Often, in an effort to minimize their tax burden, they will minimize profits by running personal expenses through the business – essentially using the business as their personal piggy bank. Very quickly, the lines are blurred between their personal and their business expenses and owners can become very dependent on the business profits to fund their lifestyle. This practice, which may start out relatively small and innocent, can get out of control quickly as the business grows.  

When planning for your eventual exit, analyzing what the business pays for—and how those expenses will be funded post-transition is eye-opening. You may have to face tough choices:  

  • Do you need to stay longer to increase business value? 
  • Can you reduce your current spending and save more money before the transition? 
  • Do you need to consider lowering your standard of living post-transition?

Are You Financially Ready To Exit?

Prior to any sale or ownership transfer, you need to determine just how financially reliant you will be on the transition proceeds and develop a plan for closing your Wealth Gap. Take steps now to analyze your current situation, determine your financial needs for the future, and develop a comprehensive exit plan to set you up for the retirement you deserve!

It’s Time to Reap Your Reward

Join BTA’s FREE membership to gain access to our Transition Readiness Assessment which will help you determine how ready you are to exit or transfer the ownership of your business to others. You will also receive a FREE Introductory Course and an electronic version of our book Cashing Out of Your Business – Your Last Great Deal.

Learn more here.


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