How much do I need to retire comfortably as a business owner?
Comfortable means something different for every business owner. There’s no single figure that applies to everyone…
Working out your own version of what a comfortable retirement is means looking at three things:
1. What income you need to achieve your version of comfortable
2. How much you’ll need in your ‘pot’ to achieve that income (we call this your Financial Freedom Number)
3. What you've already got and how much of a gap you have
By answering these questions, you’ll also find it easier to decide the specific figure that tells you what a comfortable retirement actually costs and by when you could get there.
Once you know this number, everything else, from your pension contributions to your business plans, has a target to work towards.
Let’s start with your target income
Before you can work out a pot size, you need to know what you'll actually spend. A useful way to define this is to look at your costs in retirement, rather than your income today.
You can do this by asking questions like:
• Will your mortgage be paid off?
• What do you want to do with your spare time and what will that cost?
• Are you going to be supporting anyone else financially?
• Do you want to travel, downsize, or help family with school fees or a house deposit?
You might find your retirement income is quite a bit less than your current income, once pension contributions, work-related spending and maybe even your mortgage drop away.
Defining your Financial Freedom Number
Once you know the income you want, you can work out the size of pot needed to generate it, to give you your Financial Freedom Number.
As a rough guide you can use a 4% withdrawal rate: for every £40,000 of annual income you want you need to build a pot of around £1 million, adjusted for the State Pension and any other income you'll have coming in.
Having a plan around your number is the best place to start. Financial Freedom Planning takes your actual figures and turns them into a clear roadmap, so you know exactly what you need, by when, and how you'll get there.
It's how we help you turn business success into personal security.
Find out more about Financial Freedom Planning.
Take stock of what you've already got
Your Financial Freedom Number becomes useful once you can measure it against where you currently stand. That means adding up:
• pensions, including personal pensions and workplace pensions from before you started the business;
• ISAs, savings and other investments held outside the business;
• any other assets you might liquidate, like property;
• the current value of the business, if a sale or exit could form part of your thinking.
Seeing all of this in one place, alongside your target, gives you a clear gap to close. That gap becomes the focus of your planning from here.
Start to close the gap
Your business is one of the best tools you have for building towards your number. For example, structured company pension contributions can move profit into your name in a tax-efficient way.
A sale can add to the picture too, particularly with reliefs like Business Asset Disposal Relief reducing the tax on a qualifying exit.
But a sale relies on the right buyer showing up, at the right time, for the right price. Building your number through steady contributions gives you something solid to work from, with a sale sitting on top as a welcome extra if it happens.
Read our guide, "When can I afford to retire if I run my own business?", for more on how pension contributions and a business sale fit together.
Here's where to start:
• If profit allows, first maximise the current tax year’s pension allowance and then use up any unclaimed allowance
• Review your salary and dividend split every year, rather than taking ad hoc drawings
• Watch your overheads closely. Every pound saved is a pound working towards your Financial Freedom Number
• Ask your accountant to check your contributions and extraction levels every year, so they keep pace with the business
Keep up to date with your numbers
Profits change, tax rules move and your own plans evolve. Your Financial Freedom Number is the target but your plan might need to flex as things change.
Reviewing your plan against your live numbers, ideally through your management accounts, keeps your plan grounded in what's actually happening in the business right now.
If you'd like help defining your Financial Freedom Number, get in touch about our Financial Freedom Planning service. We'll work through your numbers together and show you how much you need to retire comfortably and how to get there.