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Entrepreneurs: preparing for retirement with wealth modelling and financial planning
LO Patrimonia SA
Lombard Odier Group
There is an experience common to many entrepreneurs looking ahead to retirement – a moment of surprise when they discover just how much wealth they have accumulated throughout their working lives.
The feeling of pride in a job well done is matched by a determination to preserve the money earned, so as to make the most of retirement and pass on at least some of it to the next generation. With the assets often tied up in pensions or the business itself, this is the point at which a good investment strategy should be put in place that suits the individual’s life goals and retirement objectives.
As an entrepreneur, it is important to begin preparing for retirement at a sufficiently early stage – at around your fiftieth birthday at the latest. You can then use the intervening years to maximise your pension while reducing your tax burden and optimising your company’s valuation. Naturally, the room for manoeuvre shrinks as you approach the point of retirement and selling the business.
Read also: Preparing for my retirement – where should I begin?
The key principles of financial planning
At Lombard Odier, we advise business owners to start preparing for retirement by going through a detailed financial planning process. This involves working with an expert who will model assets, income and expenditure over time, including tax considerations. This projection, which looks decades into the future, then serves as a basis for decision-making and a key thread to follow throughout retirement.
So, what is involved? The first step is to conduct an audit of your family situation, your finances and your assets to get a full overview of your life circumstances and financial position.
Next comes the question of objectives. When do you plan to retire? How do you plan to draw your pension assets (annuity and/or lump sum)? How can you optimise your tax position and how will that change post-retirement? Do you have sufficient assets to fund your retirement? What investment strategy should you choose to guarantee your income? Are you looking to make any lifetime gifts to loved ones in the coming years? What inheritance do you want to pass on to your children? And are your loved ones properly protected in the event of your death?
There are any number of factors that can affect your financial plan, though the cornerstone must always be the monthly budget that you want available to spend in retirement.
This element tends to be non-negotiable, as once an entrepreneur has fixed their budget they tend to be reluctant to reduce it, even if the makeup of spending shifts over time (particularly in terms of the split between leisure and healthcare costs).
A model is then made containing different scenarios, giving you clarity about the decisions that need to be taken, the income associated with each option, and how this fits with the budget you want. The variables incorporated into the model can include the selling price of the company, your debt on retirement, the form in which pension savings are withdrawn (annuity and/or lump sum), your chosen place of residence, intended lifetime gifts, plans to receive payouts of pension capital, and planned age at retirement.
Given the numerous factors at play, it is wise to start thinking about matters as early as possible. Having a clearly modelled projection in place can influence the strategies that you, as an entrepreneur, can put in place during your working life, for example by purchasing pension fund contribution years.
Read also: Planning for retirement: the 6 key questions
Efficient tax management
The next step is to flesh out the approved action plan. This sometimes involves a period of learning to manage your private wealth and construct a financial market investment portfolio. The specialist advisors and partners at Lombard Odier are here to help you through this process.
One question that will inevitably arise is how to manage y
our liquid assets upon retirement. Here, it is essential you work out your short, medium and long-term cash requirements, and create an investment strategy that reflects your needs, your personal life goals and your risk profile.
Consequently, we recommend structuring your financial assets to reflect different phases of consumption needs, which is achieved by creating sub-portfolios:
- a liquid sub-portfolio to meet short-term needs
- a separate sub-portfolio for medium-term needs, with minimal exposure to market risk
- and, finally, a third sub-portfolio for older age (the “third and fourth ages”), in which more dynamic investment strategies can be implemented
The aim is to use this financial planning work as a tool for efficient tax management, while maintaining a consolidated vision of your banking assets. Good planning of pension capital withdrawals (pillars 2 and 3a) spread across several years and destined for different sub-portfolios – can, for instance, enable you to reduce the impact of progressive rates of tax and hence the resulting tax burden, and significantly improve the after-tax performance of your assets.
A financial plan of this kind acts as both a compass and a roadmap. It should be regularly updated in order to reflect the impact of new decisions on your future wealth. In short, financial planning aims to efficiently ensure that, when you reach retirement, you can enjoy the fruits of your labour earned throughout your working life.
Important information
This document is issued by Bank Lombard Odier & Co Ltd or an entity of the Group (hereinafter “Lombard Odier”). It is not intended for distribution, publication, or use in any jurisdiction where such distribution, publication, or use would be unlawful, nor is it aimed at any person or entity to whom it would be unlawful to address such a document. This document was not prepared by the Financial Research Department of Lombard Odier.
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