Start-ups are by their nature focused on the short term future, Growing the business, Hiring people, finding customers, Managing the business, dealing with the bureaucracy etc. etc.
But if we were to take the long term view like Toyota for example who have a 50 year plan we would probably be considering what we will do when we want to make our exit from the business.
I know that when I started the first business I had one child and with the hope of my naivety I named the business Peter Cronin and Son. Now years later I recognise that somewhere in my head I was thinking that when I wanted to retire I hoped that my son would take over the business.
Now I am looking at the reality of later life one of the things I have to look at is an exit plan, a way out that will contribute to supporting me in my old age and if I had been smart I would have been more proactive when I was younger. The problem is that when you are raising children etc. there often is no time never mind money to consider what about when I am old.
With the changes in the older population the state is changing the rules. The old age pension will be pushed out to 68 in the short term and 70 in the medium term. But it is critically important to ensure that you are eligible for a contributory old age pension. I mean who wants to be means tested in your 70’s or 80’s?
This is complicated but what you need in essence is an average of 48 contributions (class A or S) every year of your working life from whenever you started. My advice: Check it out on my welfare.ie.
But do you fancy living your later years on an income of €243 a week or simply €1075 a month. Okay that rises to a whopping €405 (21½K) for a couple or €487 or €26,000 if both people qualify in their own right.
That doesn’t suggest a good quality of life to me.
If you were to have another 1000 a month you would need to have a fund in the region of 400,000 assuming you lived into your 80s.
How will you provide for this? Lots of people downsize their home and buy something smaller and cheaper and generate a fund that way.
Some buy a private pension. As a sole trader you can invest an amount from the profits of the business tax free that is equal to your salary. If you are a limited company there is no effective limit to how much you can invest.
If the fund is well managed – this is the real research you need to do: find the best fund to make your pension grow.
For example:
If you put in 1000 a month and the fund grew by 6% every year at the end of year 5 you would have invested 60,000 but the fund would be worth 72,000. After 10 years you would have invested 120K but the fund would be valued at 165K. Over 20 years that would create a fund of over 440K but that’s a lot of If’s. If annual inflation was 4% then the real value of the fund is reduced substantially.
The most common fund though is what you receive for the sale of your business. Who will you sell it to? How much can you expect to receive?
The normal price is 5-7 times the average net profit (which includes your salary) So let’s say the business generates an average of 40K a year for you and another 6K that you leave in the business. That would mean the annual profit is 46K and that therefore the value could be between 180K and 320K. So let’s say its 250. You can sell for 250 and assuming that you can get 5% interest by careful investment that is 12000 a year or our target €1000 a month without ever reducing the 250K
The point really is that the state pension is not enough. What will you do to make your later years quality time and what’s your exit strategy from your business?