Work Optional Lifestyle

From Barron’s: Future Returns: Planning for the New Retirement

BY Spectrum Wealth Management | Jan 17, 2023
By Rob Csernyik
January 5, 2023

A dream retirement was once commonly viewed as leaving work behind for a life of leisure. But for a sizable number of wealthy business owners, the “dream” is to keep working.

In a December 2022 survey from Chicago-headquartered Northern Trust Wealth Management, 32% of business owners said they wanted to remain active in their current business as opposed to retiring; another one in five want to start something new instead. While 19% of respondents who sold their businesses said they keep busy by pursuing leisure activities like travel or sports, 29% said they spend their time starting new businesses.

Eric Czepyha, Northern Trust’s director of business services, suggests this new perspective on retirement is due not just to living longer, healthier lives or a pandemic-era priority reevaluation to favor philanthropic ventures over time on the links. Instead, Czepyha offers a less philosophical reason: Strong M&A activity—a record US$5.1 trillion globally in 2021, according to PwC—has put “more money in their bank accounts than they would need to retire.” These factors combine to offer motivation and opportunity to put this wealth to work, rather than generating passive income from it.

To better understand these perspectives, the Northern Trust Institute surveyed more than 150 business owners during the third quarter last year. Nearly two-thirds of respondents have annual business revenue exceeding US$50 million, and the group surveyed intends to distribute 70% of their wealth to immediate family members. This desire for a “new” retirement requires extra considerations—such as careful evaluation of future investment opportunities and readying heirs to inherit family wealth portfolios, which can include multiple businesses and complex or hands-on assets.

The business owners surveyed have clear visions for their wealth⁠: More than 90% have estate plans in place, but in practice some balk at the level of planning a more active retirement can entail, preferring to use intuition or plan informally.

Czepyha cautions against this.

“You’re planning for the potential of increased complexity down the line, both with respect to your wealth and with respect to your family,” he says. The family tree gets more complicated as it grows, and adding future real estate investments or a family foundation to the mix makes it harder to build a framework around family wealth, he adds.

Czepyha spoke with Penta about the personal, family, and financial strategies business owners need to keep in mind as they take steps towards retirement⁠—whatever that looks like.

Apply Business-like Discipline to Retirement Decisions

Business owners encounter a host of decisions along with planning for some form of retirement—from preparing heirs and structuring decision-making processes, to evaluating future investment opportunities and capital sources for new projects. Czepyha says it’s critical for business owners to apply techniques used in the family business when taking these next steps.

“They have plenty of discipline in how they run their business, they have a board, they have a decision-making framework, they have quarterly reporting on the business’s performance,” he says. Applying similar tactics when stepping away from or selling a business can benefit business owners just as much.

This is especially important for those looking to start new projects. Czepyha notes that business owners often have complicated balance sheets that offer different capital sources—from putting debt on a business to leveraging real estate investments—to use for future projects. These carry different traits related to complexity, loan terms, and personal tax implications which need to be carefully considered.

A disciplined plan for what types of direct investments are desirable is also helpful, and should encompass not only investment evaluation criteria, but who is involved in the decision-making process. This may include an ad-hoc advisory board of trusted friends, family, or other advisors.

Role Clarity As a Proactive Measure

Even the best-laid plans of business owners can change in retirement. For some, this is due to downscaling their workload by choice, while for others it is necessitated by health.

Czepyha says clarifying roles is necessary for business owners and other team members as well. By ensuring family members understand what decisions and tasks they are involved with and providing clear exit strategies, intrafamily conflicts can be avoided. Heirs inheriting wealth frequently play many roles with unique responsibilities like board member, employee, and shareholder. By helping family members understand these separate responsibilities and why they have been assigned these roles, smoother transitions can prevail if changes occur.

This can prove particularly important when starting new ventures in retirement, such as a family foundation or investment fund. Northern Trust suggests that a shareholder agreement, complete with a mechanism for family members to sell shares and exit, is a solution that can mitigate conflict if challenges are encountered.

Show Heirs Entrepreneurial Skills Instead of Telling

As business owners approach retirement age, there’s often a desire and opportunity to spend more time with the family’s next generations. Given that 70% of survey respondents plan to keep their business in the family, there’s little doubt time will be spent sharing business and life lessons to assist with this transition.

Czepyha suggests business owners cultivate entrepreneurship among the next generation⁠—showing children how to pursue their own passions, while also preparing them to be responsible stewards of family wealth, instead of merely telling them what to do.

Many clients use their wealth as an opportunity to encourage the family to work together, he says. “They might set up a trust, for instance, or a family limited partnership with some capital in it and some rules around how family members—particularly younger generations—can invest that capital in various startup ventures, for instance.”

This takes on a special importance in complex portfolios. Providing hands-on experience can help ensure even unique assets like venture capital or real estate investments are ready for heirs, who otherwise might find them challenging to manage, Czepyha says.

This article was originally published in Barron’s on January 5, 2023, and was written by Rob Csernyik.

  2. Image courtesy of iStock.

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