Planning for Retirement and Succession

July 17th, 2017

retirement-7-17-17.pngWhen retirement planning is ignored and not clearly communicated, even the most thorough succession plans will fall apart. Successful exit strategies require equal parts retirement and succession planning. Too many banks are forced to sell because of a lack of retirement planning foresight by boards, chief executive officers and other senior leaders.

Proper retirement income planning optimizes one’s income and reduces financial and exit strategy risks. It also provides individual options as one enters retirement. Two imperative questions need to be addressed: Are you truly prepared for retirement? If so, are you prepared for a successor?

Let’s consider some important statistics concerning retirement planning:

  • Average retirement age: 63
  • Average life expectancy: 85.4
  • Average healthcare out-of-pocket costs: $200,000 over 20 years
  • Retirees with a pension: 32 percent
  • Americans anxious about their retirement income: 74 percent
  • Americans confident about their retirement income: 21 percent
  • Business owners expecting to retire within 10 years: 67 percent
  • Business owners that do not have a succession plan: 70 percent
  • Family businesses that pass successfully to second generation: 30 percent (10 percent to third generation)

Sources: Northwestern Mutual Life Insurance Co., Forbes, Social Security Administration, Fox Business, & Benefits Pro

To have a financially secure retirement, it is essential to plan, be proactive and stay informed. Risks to address include:

  • When considering life expectancy, prepare for the fact that for a married couple aged 65, there is a 1-in-10 chance that one spouse will live to age 100.
  • Watch the unpredictable market as the S&P has had, on average, a 10 percent correction every 18 months since 1945.
  • Be mindful of inflation, taxes and health care costs which rise 6 to 8 percent each year.
  • Consider that an individual turning age 65 has a 70 percent chance of needing long-term care in his or her lifetime.

The next critical steps in proper retirement planning include identifying your goals, developing a personalized financial plan, implementing your strategies and annually reviewing your plan. Financial professionals are great resources for further education and can help with risk management, wealth accumulation, and retirement income preservation and distribution. Creating a financial plan with options helps mitigate market volatility, tax uncertainty and longevity risks.

Additionally, without proper retirement income planning, most business succession plans will not be successful. The purpose of long-term succession planning is to create an ideal plan that considers the organization’s goals, culture and philosophy. This is a fluid plan that is affected by many factors and consists of many subtopics. The ultimate goal remains constant—to achieve a smooth and strong transition between the CEO and successor.

Furthermore, it is crucial for senior management to identify potential internal candidates to fill key leadership positions, as well as develop these talented people in a systematic way that will help them succeed in carrying out the bank’s goals and objectives. Equally as important is to successfully retain the existing key officers while making them better performers, and the bank a better performing organization.

Lastly, for effective succession transitions, business leaders strive to retire on their terms and must first consider their own retirement plan and then the bank’s succession plan.

Bank Succession Planning Best Practices:

  • Determine a future CEO candidate.
  • Discuss retirement succession planning with the board.
  • Define a potential internal pool of candidates.
  • Decide on successor in conjunction with the board.
  • Create nonqualified deferred compensation plans for that successor to demonstrate a financial commitment.
  • Assign administrative assistance and train the successor accordingly for a smooth transition.
  • Proactively manage political and emotional dynamics.
  • Establish additional employer-provided supplemental retirement plans for future leaders.

Retirement planning is not an easy task, especially when one’s outcome is predicated on the successful transition of a business. Don’t try to tackle this task alone. Work with a trusted advisor and develop a comprehensive financial plan, then use the support to execute. Best of luck!

dfritz

R. David Fritz, Jr. is managing partner at Executive Benefits Network.

pmarget

Pat Marget is managing director of Executive Benefits Network and a 13-year veteran of the financial services industry.