Have you thought about retiring? Or would like some freedom to focus on other things? If so then you need to start thinking now about your FIRE (Financially Independent Retire Early) figure. This is the lump sum amount of money you need to make now in order to realise that dream, and not have to worry about supporting yourself in the future.
So what is that figure for you? How can you work it out? And how can you work out a sustainable and realistic way to reach this figure? As part of my coaching process, I have worked out a system to help answer these questions.
Start with your annual living expenses
First of all, before making a plan on how to get it, you need to think about your FIRE figure. The best way to start with this is to ask yourself what are your annual living expenses? You don’t want to start by making the mistake of underestimating this. Some people may retire and they might have saved up £200,000, but their annual living expenses is £40,000, they are not going to get far on only having five years living expenses. Often as construction business owners, we may not be investing in a pension, so we need to work out how to create a lump sum figure that will give us what we need.
Maybe you are on the tools right now, if you continue that way you will hit a bit of a bottleneck in your business and not be able to expand. This will mean you won’t be able to save up enough money to get to your FIRE figure. You need to start creating a strategy now. This could look like a variety of things. Maybe you could go into property development or alternatively sell your business. If you want to sell your business you need to get up to boardroom level within your company and have a turnover of around £4m-£10m. This figure is different for everyone but it’s good to plan now, and have a strategy to get you there.
What is my FIRE figure?
Now you know what your annual living expense is for you and your family to live comfortably, you can work out what you will need to support yourself when you retire, your FIRE figure. It is just a case of some simple maths. You just divide your annual expenses by 0.03.
So for example if you work out that your living expenses for a year are £50,000, if you divide that by 0.03 = 1,666,666. So your FIRE figure would roughly be £1.6m. This is what you would need to have in the bank before retiring comfortably and not have to worry about working again.
What if I want to sell my business?
Often businesses are valued on what is called the EBITDA (Earnings Before Interest, Taxes, and Amortization). This is what you are earning before anything gets taken away by your accountant, essentially your bottom line. When we know our FIRE figure, we can work out what we would need as annual profit in order for the business to be valued at the right amount.
Let’s use the amount from the earlier FIRE figure £1.6m. If we wanted to get that as a lump figure, what would we need as annual profit to sell for that? You can usually sell your business for between 4-8 times your annual earnings, so if we divide the fire figure by 6 = £266,000. If you create that in annual profit, you could potentially sell your business for 1.6m.
In order to work out what the net profit would need to be, look at the annual profit figure we just calculated. Assuming that you have a healthy company, you should be getting a net profit of around 12%. So divide your annual profit of £266,000 by 0.12 = £2,216,66.
So your business would need that net profit to think about potentially selling the business for the FIRE figure.
These examples are just a guide to show how you could look at your finances with a long-term view. It is important to plan ahead and have a clear strategy. As part of my coaching, I work with my clients on making this strategy for the next five-ten years. If you would like to work with me to ensure you reach your goals, book your FREE ten-minute consultation here.
