Another version of your “retirement number,” a simple wealth gap calculation could be eye-opening for retirement savers – especially business owners.
Whether they admit it or not, many business owners wrestle with anxiety surrounding their financial futures. Maybe you’ve dealt with this yourself. But you don’t have to be fearful about your retirement savings if you plan properly.
I’d like to share a quick calculation with you to help put your fears into perspective and even create plans to put them behind you. What calculation could help to ease your fear? The wealth gap calculation! Basically, it’s the difference between where you currently sit, financially, and where you need to be to live the lifestyle that you want to live during your retirement.
What Is a Wealth Gap?
Imagine you’re standing on a riverbank. The side you’re standing on represents your current financial picture. This is made up of your income and all your current assets. On the opposite riverbank is your retirement. The river in between is the distance between your current situation and your retirement goals. That gap is what you must plan for.
Without planning, that gap might as well be an impassable torrent. As a business owner, you spend all your time and resources working in your business. It’s easy to lose focus on anything other than what is directly in front of you. As a result, you could easily go through a decade or two in your business only to find out that the thing you’ve poured all your blood, sweat, and tears into for most of your life isn’t worth nearly as much as you thought it was.
Sadly, this is the reality for many business owners. They come to the end of their careers thinking they will sell their business and live on the proceeds for the rest of their lives. However, only around 4% of businesses actually sell for what the owner believes they’re worth. With numbers like that, it becomes clear that planning for your retirement, outside of your business is a necessity.
Finding How Wide Your Wealth Gap Is
To know how far you are from where you want to be, first, you must know where you are. Therefore, to measure your wealth gap, you must begin with a full assessment of your current income-producing assets, excluding your business and your home. But why should you exclude your business and your home?
I don’t think of a home as an asset because it doesn’t produce an income. Of course, you could sell your home and downsize, yielding a profit, but you would still need to live somewhere, and there will be some cost associated with that whether you rent or own.
Similarly, you can’t include your business in this valuation because you won’t be drawing an income from your business once you’ve retired from it. Once again, I realize that it can be sold, BUT statistically speaking, only about fewer than 20% of businesses are able to be sold. So, you must consider the very real possibility that you will never sell your business when measuring your wealth gap. Therefore, the first step in determining your wealth gap is finding where you currently are.