IT’S A JOURNEY
Meeting your Life Goals
Financial Advisor, Charles Ibim, had just had a sobering conversation with Adamu, his 65-year-old entrepreneur client. Adamu was recently diagnosed with stage-one prostate cancer, and he bemoaned his situation, saying: “Although this is not a death sentence, I never thought it would happen to me. I did not plan for any major illness”.
Not many people discuss the vital role that longevity plays in the financial planning process. Yet, lifespan is at the heart of every financial plan, and a miscalculation could mean the difference between an individual’s financial security and personal ruin.
A successful financial plan or model will usually include elements such as cash flow, net worth, and retirement projections, as well as a Monte Carlo stress test analysis. A model is the only way to bring your entire financial picture together, helping to quantify different planning approaches, compare scenarios, and weigh options to meet your various life goals.
For Adamu – and other entrepreneurs like him – the six Financial Drills on the following pages summarise the events that commonly change the course of the financial well-being of a business. Early answers to these drills would have prepared Adamu for successfully tackling unexpected events that could permanently harm himself and his source of livelihood
The Six Financial Fire Drills
Because business owners tend not to sufficiently plan for events that could change the course of their financial well-being, financial advisors are available to help them address the critical events that will disrupt everything personal and business. These fire drills (also referred to as the six “L’s”) ensure that a successful business (or family) fundamentally becomes and remains a security blanket:
- Liquidity needs: If Adamu needed to spend a large sum of money to cover an office expense such as a part building collapse, where would the required $250,000 come from? Many businesses usually do not maintain extensive liquidity because an enormous amount of their capital is tied up in operations. The result is that businesses turn to lines of credit in this particular circumstance. If Adamu had run this drill, he would have had to ensure that there would be access to cash in the short term, for emergencies;
- Long-term disability: Business owners habitually contribute extensive sweat equity to their company’s success. Should they become incapacitated, the entire organisation can suffer – everything from sales to distribution, operations and customer retention, and the company’s value. Is there a plan in place to prevent such a situation? The first step would be to identify a capable interim leader, while assessing how soon a succession plan should kick in, in the event of long-term incapacitation. Other solutions can include business overhead insurance or policies that offer income replacement. Provisions could also be made for key employees to buy out the business owner.
- Loss of life: Supposing Adamu’s medical treatment is unsuccessful, and he passes on? Or the same fate befalls his business partner or a vital employee? Life insurance and key-person coverage can be an effective tool in this scenario. However, one of the biggest issues that business owners unfortunately ignore – becoming forced partners with their deceased business partner’s spouse.
- Long-term care: Many older generation business owners are rightly beginning to evaluate what would happen if they required advanced medical care. This worry is legitimately extended to concerns about their own elderly parents. Example: If the entrepreneur needs to take time off from work to help provide care for an unwell parent or family member, the capital needed must be planned for in future projections. Otherwise, the potential disruption to company operations and revenue could result in dire consequences such as forced liquidation of business assets;
- Longevity: What if, on the contrary, Adamu ends up living an unusually long life? He will need to consider how, with age, decreasing interest and capacity, his role in the company will evolve in terms of succession. If Adamu lives to be 102, does he expect to earn an income for life? That could result in a gigantic expense for the business, and significant burden for the succession team. If Adamu lives 25 to 35 years in retirement, he cannot assume that the business will remain viable for that long. In that case, annuities or pensions could be a sensible option for diversifying his retirement income. These are all important long-term cash-flow questions that must be crucially considered;
- Legal/ Liability/ Legacy: What kind of legacy would Adamu like leave behind in the next one, 10 or even 100 years? If a long-lasting, multi-generational legacy is important to him, Adamu can turn to various types of trusts, gifts and legal structures to help ensure that the business is not hit by monumental taxes when ownership is passed to his offspring or any other beneficiary. This type of planning requires estate and tax professionals to make sure that the local laws and documentation align.
Getting a ‘Return on Life’
A major reason for people sometimes avoiding financial planning is their conscious or subconscious awareness that doing so will require them to unpack a number of issues that may be uncomfortable — issues around mortality, family dynamics, individual needs, and even feelings of guilt, shame, fear and inadequacy around finances.
The key takeaway is this: An annual financial planning review needs to go much deeper than portfolio performance and asset allocation. Potentially disruptive scenarios like those described under the six Ls” need to be pointed out and addressed. At each review, plans must be revisited to determine if responses to the financial fire drills are still effective.
When you go through a proper financial planning process, your money can truly work for you and help you achieve your life’s ambitions.