WealthBUILDER Series 3 - What's your Wealth Gap?

by Adam Marlow

WealthBUILDER Series 3 - What's your Wealth Gap?

Welcome to the third edition of the Financial Freedom series!

In last month’s article, I explained how to calculate the amount of income and therefore how much wealth you’ll need to accumulate to provide sufficient passive income for a comfortable retirement.  

In this article, we’re looking at the next step in what here at Marlows we call the retireSAFE process, which is to ascertain if you have a wealth gap i.e. the difference between where you are now and where you need to get to wealth-wise.  

After that, we’ll look at ways to reduce the gap and see whether your preferred retirement date is actually feasible! 

If you’ve had a stab at producing a rough estimate of your future income needs and calculated the wealth pot needed, next we need to know where you are now. It’s not rocket science to tot up everything you own and produce a personal balance sheet. Your business has one so what we do is to follow the layout of that. 

Start with any properties you own, but not your home, unless you plan to downsize to free up some capital to invest for a return. Same goes for a holiday home if you don’t plan to dispose of it. Unless you rent it out.  

Include any buy to lets, and commercial property, no matter whether they’re in your own/spouse’s name or they’re sitting in a company or trust for tax purposes. Then deduct any mortgage balances from the property values to arrive at the net equity.      

Next list out your investments and savings, again in whatever type of accounts they’re in. Also, add in the value of your pension funds as we’re keeping this simple by looking at all your assets no matter what legal entity they’re held in. 

Next, it’s that $64m dollar question. If you have one, what is your business worth? Some businesses generate good profits but don’t have a lot of capital value once the principal has retired as there’s nothing to sell.   Others that are saleable depend on what someone is prepared to pay you to hand over the keys.  

There’s an entire article dedicated to this topic later in the series but to put some kind of estimated value on your personal balance sheet I tend to take a common approach of four times the maintainable average profits after making several generally accepted adjustments. 

There may be some other industry norm for valuing a business in your sector so use that if so. Whatever looks reasonable add that into your personal balance sheet. 

Just a quick point about the state pension…, you’ll probably currently be in line to receive some amount of state pension at 65/67 but if you want to retire or work less at say, 55 there’s a good chance the state pension may be removed or means-tested by the time you get there, so let's ignore it for now and look at it as a nice bonus if and when you do get it.  

We’re now at the stage of totalling up all your assets, net of any loans etc to arrive at your current total wealth. In last month’s article, we played with a few example numbers and found that after-tax and inflation to get a current £4000 per month you’re going to need around £2,500,000 of income-producing assets/investments.  (working on a 10-year timeframe) 

You might be in the fortunate position to have already accumulated this figure and if so well done, but stay tuned over the next months as there’s plenty of sound financial planning advice ideas to come.   

But for the purposes of this educational piece let’s just say you’ve estimated your business value and you’ve been a dedicated saver in your pension and ISA’s and you’re currently worth £1,000,000. Therefore, quite simply your wealth gap is a cool £1,500,000. Yes, frightening! 

You may have said that you want to work for another 10 years so this means you need to increase your wealth by £150,000 per year. 

You might find that when you run these numbers for yourself you find that this amount is simply not possible in 10 years which means you'll need to extend your retirement date, which is a shame but maybe reality. 

Assuming you think you can manage it in your preferred time frame how do you go about it? Well other than coming into a sizeable inheritance, you basically need to follow a two-pronged attack in which step one supports step two.  

Step 1 - is to increase the amount of money you save in your pension and investments each year.  

This can be done by earning more profit/income or by cutting back on your lifestyle. If you have your own business you have the perfect opportunity to create more funds. You’re actually in charge of your own destiny, whereas someone working for an employer on a set salary doesn’t usually have this luxury.

So for you, making more profit than you need to draw for your living costs and investing this wisely in whatever type of assets you prefer is possible. This may actually be reinvesting these profits back into your business to grow it, or use external investment options which I’ll attempt to demystify in next month’s article.   

Of course, the other way to find more money to invest is to spend less personally! Over the years I have seen clients find this very difficult to do. Reducing your lifestyle when you’ve got used to the finer things in life is possible, but it takes a lot of discipline to stay there for the long term.  A year or two yes, but for say for 10 years is hard, and let’s face it you might not even live that long (sounds morbid I know but it’s a factor) but carrying on with too much excess may mean you never get to retire. Again that may be fine by you? Both heavily scrimping or spending is unhealthy, instead, you need to find a balance you can live with.  

Step 2 – is really the by-product of step one.  

The extra profit you make in step 1 should also increase the value of your business (if it’s one of those saleable businesses I mentioned earlier) and that now larger business value will help to fill a big part of your wealth gap.  

This is what most business owners rely on only to be disappointed,  especially if this is a long way off in the future and with this uncertainty that’s why I recommend not over-spending so you can exploit Step 1, the ‘investing years’, which is what I’ll look at in part 3 next month. 

NB. Increasing yearly profits is not the only factor needed to maximise a business’s value (we’ll look at these factors in a later article in the series in a couple of months). 

If you would like help with planning for retirement then call on 01530 833474 or email adam@marlow-proactive.co.uk to book a meeting with me.

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