Dentists Who Invest Podcast

What To Do When You Sell Your Dental Practice with Luke Hurley and Anick Sharma [CPD Available]

• Dr. James Martin • Season 3 • Episode 401

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Are you a dentist looking to grow your wealth? You can connect with Luke and Anick here: https://www.viderefinancial.com/investment-options-review

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The decision to sell your dental practice represents a pivotal moment that can shape the rest of your life—yet many dentists find themselves unprepared when that day arrives. In this comprehensive exploration, financial planning experts Luke Hurley and Anik Sharma reveal the critical strategies that can maximize your practice valuation while ensuring financial security throughout retirement.

Far too often, practice owners focus solely on achieving the highest possible sale price without understanding their true "number"—the amount needed to sustain their desired lifestyle indefinitely. Through powerful financial modeling, we demonstrate how calculating your lifetime consumption needs can transform both your negotiation position and post-sale strategy. One revealing example shows how a seller remained deadlocked over a figure far higher than what financial planning revealed they actually needed to live comfortably for life.

Beyond the numbers, we explore the emotional dimensions of practice transitions. Your identity may be deeply intertwined with your professional role, making the psychological adjustment as important as the financial one. For those considering earn-out arrangements, we discuss the unique challenges of answering to new owners while watching changes to the business you've built.

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Disclaimer: All content on this channel is for education purposes only and does not constitute an investment recommendation or individual financial advice. For that, you should speak to a regulated, independent professional. The value of investments and the income from them can go down as well as up, so you may get back less than you invest. The views expressed on this channel may no longer be current. The information provided is not a personal recommendation for any particular investment. Tax treatment depends on individual circumstances and all tax rules may change in the future. If you are unsure about the suitability of an investment, you should speak to a regulated, independent professional. Investment figures quoted refer to simulated past performance and that past performance is not a reliable indicator of future results/performance.

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Dr James:

Selling a dental practice is one of those massive life decisions that people often dreamwalk into a little bit, and that's usually because they're just so busy thinking about other things that the next thing they know the day has arrived. And actually there's a lot of things that you can do beforehand, both to get the best valuation and also to ensure that your money lasts as long as possible, so that there's zero chance of you having to return to work in old age. That's the worst possible outcome that we can imagine whenever it comes to a business exit. I'm joined today by Mr Luke Hurley and Mr Anik Sharma, who represent Videra Financial Planning. We're going to be talking about the ins and outs, everything you need to know to plan ahead from this decision. No matter what stage you are at in your practice ownership journey, even if are still an associate, this stuff is well worth listening to. We do so in order to illuminate the path and guide everybody so that they know exactly what to expect whenever the big day comes. I'm also happy to share that there is free, verifiable cpd associated with this podcast episode. Whenever you finish the episode, all you have to do is click the link in the podcast description. It'll take you right through the Dentistry Invest website, you'll be able to complete a short questionnaire and, once passed, you fill in your reflections and we'll go ahead and email over to you your verifiable CPD certificate, which is entirely free. What that means is this podcast episode will be able to contribute towards your verifiable CPD hours during this learning cycle.

Dr James:

All right guys, welcome to another webinar this beautiful Wednesday evening on selling your dental practice and how to get the best deal and the things that you can do beforehand. Long before that day comes, that conversation. Conversation comes because, believe it or not, it's never too early to put in prep. And then also, as well as that, what happens afterwards too, because oftentimes and I see this all the time I literally had a conversation with a practice broker the other week who said that he held his hands up and said I really deliberately don't get involved in what happens after someone sells the dental practice. They just go and talk to their accountant and the clues are already like the accountant is just there to minimize tax, maybe a little bit of tax planning as well.

Dr James:

But what about how we get the cash to, first of all, well protect its value, as in protected against inflation, and then, second of all, how do we siphon off some sort of residual income from the cash afterwards so that we know that we can get our money to last as long as possible? We know we can get the biggest bang for our buck. Anyway, without further ado, that is what tonight's webinar is about. I am joined by two financial planners, mr Luke Hurley and Mr Anik Sharma. Both of those financial planners represent Fidera Financial Planning, and we're all here today to learn about what we can do beforehand when it comes to selling a dental practice, during selling the dental practice, and after as well. Luke Anik, anybody like to step up and take the lead from the get-go?

Anick:

James, I'll take this one. Hey, everyone, yeah, so it's selling a practice your business. It's such a huge, emotional and life-changing event. It's that whole adage of failing to prepare and it's really important to get all your ducks in a row and not rush into anything. Look like to split this up in three different phases. So plan, protect and invest the opportunity cost of brushing into any irreversible changes versus, say, going into some sort of sub-optimal allocation or locking money away. It's not worth it. It's.

Anick:

It's so important to get everything sorted, give yourself the space, the breathing room, and plan each decision diligently. We don't want to be going chasing the best rate or the best fund or whatever that even means, from day one. Now we will come on to your cash flow model later on. But a lot of this work, the planning, the prep, it's all underpinned by looking at your lifetime consumption how much do you need now? How much you need in the future? What about the future? What about if there is excess inheritance tax? All these sort of things? By having a clear vision of where we want to get to that point b, it's a lot easier to to look at point a before the exit or before the capital event and create a long-term strategic plan in place to make sure that we get there efficiently and everything is structured um, as it should be now, even before we get to to sale date.

Anick:

Essentially, it's important to get everything sorted beforehand. So, from a business selling perspective, get those ducks in a row. But what does that mean? De-risk yourself as the only reliant. Don't just make everything about you. Make sure systems, processes, infrastructure are clearly documented. You can show an evidence that there's been a clear pattern of growth and patient retention along the journey. Make sure systems, financials, etc. Different structures are tidy articles and whatnot. Then, when it comes to the actual structure of how you do it, it can be sliced and diced in in so many ways, but understand the difference with what you're doing asset versus share sale. Are you going to structure it with a deferred payment or is it going to be a earn out over x period of time? Now, depending on what options you choose, that's then going to have a different impact on your lifetime cash flow and and how much is in your pocket to live your life and do what you want with it, and that's going to have implications on tax and and and so on.

Anick:

What's really important here, though, is understanding your number, and it's that whole adage how much do I need to never run out of money and go on holiday 10 times a year, or whatever it might be? Now we've had a lot of experience with this, helping people through the, the buying and selling process. Naturally, there's a lot of friction, the the seller wants the highest possible price and the buyer wants the lowest possible price, so naturally it can be quite a point of friction. I've had situations where someone has built up a fantastic practice and they've anchored to a certain figure in their head which the buyer wasn't willing to give, and that essentially led to a standstill. No one was willing to budge.

Anick:

Now, having gone through the cash flow planning exercise and calculating lifetime consumption and what that number needs to be, it actually transpired that the individual needed a fraction of that amount, so they were tying themselves up in knots with a situation that didn't need to be there, adding a load of stress when it's not required going into that negotiation or starting the process. Understanding what number you need to live out the rest of your life is so powerful, and having that in play is important before, before going down the journey. Speaking of the cash flow. Luke, I think you have a bit of a demonstration here.

Luke:

Yes, I do. Let me just share my screen Just whilst that's loading. One thing that struck a chord as you were talking there about the importance of taking your time post well, pre and post-sale, but in particular post-sale not rushing into decisions. I have also encountered quite a few times the opposite of that, which is where people haven't necessarily done any planning and a large lump sum appears in their bank account and they might park it as we'll talk about later somewhere relatively secure, but then they're um overcome with analysis, um paralysis, uh, where I've seen it as bad as as money being sat there for two years post-sale, um, because the, the individual is just not sure. Uh, you know what to do with the cash and when to pull the trigger, and there's a particular around timing in the markets.

Luke:

Some people get very caught up in that and concerned is this the right time to invest? What happens if X, y and Z insert geopolitical event events that happen every year, consistently and have done throughout time? And so, yes, 100%, you need to take your time and plot your course, but you also don't want to be on the opposite end of the spectrum where the money's sat there being eroded with inflation, like James mentioned at the start. Let me just find the right screen, screen number two.

Anick:

And hopefully yeah, we've got that. I can see why great.

Luke:

Okay. So for those that don't know, this is um software that we use to help people plan their financial lives. Ultimately uh, it's financial planning software very powerful. Um has tax built into it and this enables us to chart somebody's trajectory from the point at which we meet them through to, unfortunately, planning for when they pass away. We run these plans until people are age 100, because we don't know what the future brings. So what's on the screen at the moment is a timeline.

Luke:

Now, this is for two clients looking to sell a practice mid-50s. They've got one son who's currently at school and going to university, and you can see that we've broken up their retirement into different phases. The reason being and that's quite a simplistic breakdown in truth, for the purposes of this example you don't spend the same amount of money throughout the course of your retirement. It's very much different phases. You're going to require different sums of money. Typically, in the earlier phase you'll require more money. You're more active, there's a lot more that you want to achieve in that space of time, and as you get older, you tend to find your spending slows as you slow and you might see a potentially plateau. There is evidence to show that you spend considerably less in your 80s than you do in your 60s, so it wouldn't be right for us to plan for a flat level of spending all the way through.

Luke:

So what we do is we put a timeline together for a client. This is different for every client. We put various markers for different events. So on here you've got their son graduating sorry, starting at university and then graduating. There's a gift here, I believe, that they want to make to their son. There might be markers for different events financial events. So this is the commencement of their 2008 NHS pensions. Had they had membership in the 2015 section, there would be a mark on that for that event. Starting at their normal pension age, we have slowing down at age 80. We have additional care costs in the last five years of life because, again, as I said, although spending might plateau, there tends to be a spike in somebody's later years. And then we've got here financial independence day, the point at which they want to be able to sell their practice. And so somebody's plan or everybody's plan looks slightly different. But we work with clients to work out what their vision is and what those milestones look like and what those milestones are likely to cost. Um, those milestone goals could be anything, anything that you you envisage spending money on in the future. But that's having a proper plan, that's having a a clear time timeline of events that are going to um in, in your ideal scenario, take place between uh, between the point that you start the process and passing on. So once we've worked out what the timeline is, we can then work out what certain costs would be.

Luke:

So, on this particular plan, we have phase one retirement. This client would like to be able to spend in the first phase of retirement £100,000 as a household, net of tax, for example. I'm not saying that that's the amount that everybody should aim for in retirement and actually, if you look at the national statistics, it's considerably less than that. A comfortable retirement Nationally, you know a top tier retirement. If you look at the data, the suggestion is that that's around about £60,000 a year, £5,000 a month net of tax. But this client wants to aim for £100,000 a year, £5,000 a month net of tax. But this client wants to aim for £100,000 every year to fund their lifestyle and, as I said before, everybody's lifestyle is different. I've met clients that are very conservative with their spending and I've taken many clients as well, who have quite lavish lifestyles and enjoy higher levels of spending, and it's about tailoring the plan to meet those objectives. So we've got phase one, phase two, the spending dropping down. There's a gift there to their son. We'll talk about gifting in a moment. There's some care costs £1,000 a week per person in care. That's again a very prudent assumption. Typically most people don't go into care homes and if they do, they don't go for five years. But we would always be very prudent in how we make our assumptions and cautious.

Luke:

So once we've decided what the vision is and what the objectives are, we can plug in what somebody's financial situation is. We can talk about what's their current income before they're going to potentially sell. So they're taking drawings from the practice, from the limited company. They've got some rental income from a freehold property, the practice building. They have a small amount in ISAs. They've got a main residence. They've got the practice freehold. And then I've left this number here blank in terms of the valuation of their practice goodwill, for good reason. I'll come back to that in a moment. They've got two modest SIPs which they're still funding.

Luke:

Nhs pensions They've got state pensions, which is a bull. State pension at the moment is just under £12,000 per person per year, so it's important to factor that in. But once we know what those inputs are, we can then look at really how is that going to play out over time in terms of their cash flow, ie, where is the every year? So these lines here all represent an individual year's worth of spending. Where is the money going to come from as they move throughout their retirement? On this plan you've got the pink, which is the freehold rental income, because they've decided to hold on to the practice building, or maybe they've sold to a corporate who didn't want to buy the practice freehold, so they've held on to that and they benefit from the rental income throughout. They've got the navy blue here, which is their state pension. They've got the green, which is NHS pension. They've got the starting point here, which is when they're still working before they've sold, and here's some money drawn down from the sip.

Luke:

But because we haven't currently plotted out what the proceeds from a practice sale are likely to be, you can see that there's a shortfall. You can see the spike in the later years for care costs. You can see the drop down here for the point at which they're. You know, we're assuming they're going to be spending less money in their entities. You can see that the line is rising and it's increasing because of inflation and there's a you know there's a mechanism for us to make that those numbers a bit more relatable by pulling that out of the plan. This looks fairly messy and that's because they're taking money from SIPs, which is really the tax burden is potentially higher there because it's not optimized in terms of their withdrawal strategy.

Luke:

But it's a very basic example. Obviously we go into a lot more detail for each client, but at that point, once we've got that position, we can actually, like Anne said, we can actually work backwards and see. See, well, what does the client actually need in terms of a sale, sale proceeds at the point of wishing to sell? So this client, for example, if they were to sell their practice at age 55, we can use the calculator to work out what amount of money they need, net of tax, in order to remove any shortfall and that conveniently produces a nice round figure that we know that actually, if they were to raise those proceeds from the sale of their practice net of tax, that doesn't include capital gains tax on the sale proceeds, but it gives us a clear idea of what they need to bridge. Any shortfall proceeds, but it gives us a clear idea of what they need to bridge any shortfall the second half of the equation.

Luke:

To go back, so let me just assume, let me just come back in here and say that the practice goodwill is actually worth £1 million. Now, when we come back in here, we can see that the shortfall has been reduced. So cash flow is half the equation and in truth, this hasn't been optimized in terms of a tax-efficient withdrawal strategy. It's simply there as an example. So there would be work done to ensure that drawing down on the assets is as tax-efficient as possible. That's part of financial planning done properly.

Luke:

But the second half of the equation is what does that then look like in terms of a client's overall asset position? What's the impact on their withdrawal strategy and on their lifetime consumption, in terms of what they're going to be left with at the end of the day? That's currently in real terms, but because they're potentially accumulating wealth, because they hold on to quite a lot of liquid assets, property which is going to be appreciating in value, they run the risk of having quite a significant inheritance tax liability in the future, and so for us, financial planning is part one retirement. What does the client need for the rest of their life in order to be financially independent and not run out of money? Ensure that that security is provided.

Luke:

Part two what does the future look like in terms of their potential inheritance tax liability and where? How comfortable are they with the amount of money that they stand to pass onto the government on death, as opposed to their heirs and beneficiaries? So it's about dealing with the two elements retirement and inheritance tax at the same time and what I would say on that in terms of preparing for a practice sale. It's a lot easier if you go through that process of working out what you need from a retirement perspective, but also in order to deal with inheritance tax in advance of a practice sale as opposed to after. There's more that you can do before you sell than after you sell, and so it's well worth having those conversations with professionals in the lead-up as opposed to post-exit, because your options are slightly narrowed, particularly around certain trust planning. So the other and this tool is fantastic. There's all sorts of things that we can model Inheritance tax, for example.

Luke:

What's the potential inheritance tax liability for a client over time? How's that likely to change. Well, when you sell your business quite significantly, because if you've got a trading business, then that trading business albeit the rules are under review and changing in the not-too-distant future in terms of the actual finer details around this but your trading business does bring with it inheritance tax efficiency. As soon as you sell that trading business, that with it inheritance tax efficiency. As soon as you sell that trading business, that money is going to be poured into your estate and your potential IHT liability, or your children or your family's IHT liability, is going to increase. And therefore it's well worth having a strategy in place to ensure that you know what you're going to do and that's not a one-off exercise. That's having a plan for a series of different actions that you're going to take, that you're going to carry out throughout the course of retirement in order to deal with that IHT liability. So really powerful technology that we use to to deliver these financial plans.

Luke:

But, as I said that the main considerations is know your number, have a plan around um, your lifetime consumption, how much money you need, the cost of your lifestyle for the rest of your life, know what the implications are from an inheritance tax perspective, um, and then I would draw one. There's another plan that I the terminology I use which is a cash management plan. So if we're talking about a financial plan being a slightly zoomed out view of your finances and how that will change throughout the course of your life, we also need to deal with the day-to-day spending. Once you've sold your practice and you've stepped away from work, which might not be immediate I appreciate if you're sort of tied in for a period of time but once your earnings have switched off, you then need to know how are you going to manage your generating the income from your assets. And that cash management plan is going a bit more granular in terms of the day-to-day, month-to-month, year-to-year, kind of a more focused view of how to manage that process. So that's how to, from our perspective, how to work out what your number is and go into those conversations in a more informed way to give you that reassurance that you know that you're on the right track and that you're going to have enough money. And, as Annick said, that's going to also help in those negotiations if you really do know what your number is as you're having those discussions.

Luke:

I touched on it in terms of tax efficiency there, but obviously the taxes to be aware of or at the point of sale. Really, for me, business asset disposal relief, clearly, which has had recent reform and is obviously becoming less attractive over the next couple of years. But there is still a band there of gains that you can have which is subject to a beneficial tax rate and it's important that you utilize that. So it's well worth speaking with your accountant or your tax advisor in advance of any sale to ensure that you're going to get the full benefit from the relief that's on offer. From a capital gains tax perspective, you get a nominal CGT annual exempt amount as well on top of that £3,000, which is not going to go a very long way, but it does exist. We need to be aware of the rules around pensions and so lifetime allowance. The rules around that were changed and, in effect, the lifetime allowance was removed. I'm not convinced that that's going to stay that way for the medium to long term, given the pressures that the Chancellor is under in terms of trying to find cash. But it's important to know what that is and should it be reintroduced. But there is also rules around how much lump sum you can take from all of your pensions tax efficiently. So it's important to plan for that Inheritance tax I've touched upon. It's important to know where you stand from an IHT perspective.

Luke:

A couple of other things in terms of preparing for a sale. Obviously you want to get the right people in. I touched on it there about tax advisor. For me that's absolutely key. Your day-to-day accountant may not be the best person to advise you over the potential tax pitfalls and traps that you might encounter and that you need guidance through. They may well be. I'm not saying that they can't be. It's just making sure that you've got the right person and it might be a different person in their firm. Actually, that's going to deal with the more complex tax advice that could be required. So make sure you've got the right advice and the right advisors and get that help in advance of any practice sale to ensure that, as Annex said, that the practice is in as good a shape as possible to get maximum value for it from the business that you've built up value for it from the business that you've built up.

Luke:

Another quick reflection I know I feel like I'm slightly on a bit of a monologue, but another reflection is prepare yourself emotionally for the sale of your business. I see this a lot. It's a financial transition which needs planning, but it's also a life transition which can also be quite unsettling for some people. Um, quite a lot of the time, people's identity can be wrapped up with what they do, and if they've um dedicated a huge amount of their life to to building up a business, then, um you know, you need to plan for what comes next, um, and that needs to be a well thought out process and it needs to um, you know, and there's exercises that we help clients go through to to enable them to really think about the, the longterm, what they want from life, um, it's it's not just about the cashflow model, it's also, you know, kind of life after life after business, um, what was not. It's it's not just the money, um. So, yeah, a few reflections there. Um, if I can pass back to annick, uk dentists.

Dr James:

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Anick:

Thanks, luke. Useful to see the cash flow. Just one point on that as well. You mentioned about the trust work and getting things sorted. That is such an important point because often people may come to us or I've experienced people come to me to to help them sort out their arrangements, just as you've been through them. But quite often coming after the capsule event can reduce our range of options. Um, a capsule event one time, once in a lifetime chance to get things right. I appreciate some people might decide to go again, but for the most part it is so important just to have a chat with professionals beforehand because if you miss that window of opportunity you could absolutely be shooting yourself in the foot. We've said at the start Luke said it there but planning is so important to get everything sorted during the transaction as well. So some mechanics um, luke mentioned about the emotional aspect of it.

Anick:

Going through an earn out can be quite difficult psychologically. Um then having to. You've built up a great business and all of a sudden you're answering to someone else for a few years. It's not going to be easy. They might start doing things in a different way than you think is best. So it's important to be clear with how that's going to look, because it's not going to be your business anymore as much as you. The day-to-day might be somewhat similar. Um, depending on how that earn out might happen tax considerations, business assets, disposal relief, etc. Um stage investing, depending on when the different tranches are received. So having a clear plan of what to do with that money is so important.

Anick:

And then that Luke mentioned there about narrowing down the tactics of cash. The actual mechanism of it is something that can often be overlooked. Everyone just thinks about the long term, and rightfully so. But it's important to take some time and think about what about the day the money lands? What are you going to do? Think about how you're going to feel. So, let's say, money hits the account. There's a few things you should absolutely have done beforehand and do at the time. So the main thing is to protect the capital and give yourself more breathing room. Essentially, so for most people, you don't want the capital proceeds to be paid into a current account. So the very first step move into a savings account, create an additional layer of security barrier. Your existing bank will likely pep you with phone calls when they see a large lump sum enter your bank. So Luke spoke about analysis paralysis before, and it can quite often be overwhelming with what to do and all the options.

Anick:

But security of funds, absolutely first and foremost. Now, with the planning work, you may have decided to set up a trust or allocate money into certain pots. Have that clear strategy beforehand and execute on it so you're not caught in in between minds of what to do. On the security of funds, this is it's important one. So most high street banks will have a thing called the financial service compensation scheme. So this covers 85 000 pounds per banking license. Now, if we're talking about a seven figure exit, 85 000 is not likely to to cut it. So securing the money is so important. Now people often kick back and say annick, don't be stupid. Insert, well-known high street bank is never going to go under. Well, everyone said the same about Credit Suisse, svb, lehman Brothers and we know how that all ended. So that banking license risk can be mitigated.

Anick:

So think about having money across various banking licenses, different accounts. There is a temporary high balance which could be useful. The other thing is the use of NS&I, national Savings and Investments. So that is essentially a range of accounts backed by the treasury. So whilst the rates aren't as competitive, you gain that security element and in this situation it's all about the return of cash safely, rather than the return on it in those first seven days a week or so. Now, if money is to be allocated across trusts, then make sure the trustee accounts are opened. Have that line of communication open between the savings account and the trust account or national savings, etc. Because the last thing you want to be doing is making test payments with a seven figure amount to see if it lands. So get that moving. Try it beforehand. Then, hopefully beforehand, you've had a chat with your planners. So once you look at the cash flow model and you have a clear plan of how money is going to be held in the short museum long term, that will help help identify what to do. Essentially, um wills, lasting powers of attorney very important to go back in and revisit following a major life event. Make sure it reflects your current wishes, um, and it's aligned with beneficiaries and any trust work that may have been done. The use of good planning strategies is so important here.

Anick:

Then, moving further along after those first couple of weeks, start to think about a cash flow ladder. So for the first 12 to 24 months. How much cash do you need? How much are you going to be spending on a monthly basis? What about going on those big holidays? You might be treating yourself to a new car, whatever it might be. Clear expensive debt ring fence. Have that emergency buffer, that just-in-case fund, then after that, a couple of years worth of expenses, say.

Anick:

There's probably an argument to then look at the investment piece. James mentioned a rise to the star. Inflation. Inflation will rip money apart if we don't try to hedge it, and that's typically why we invest. We want our money to match and keep pace with inflation.

Anick:

Now, as business owners, you are naturally okay with the concept of risk because you've set up your own business. Human psychology can very quickly change here, from building up your own business, taking on all that risk, to all of a sudden having to live out your life on this capsule that you've received. It's important to acknowledge these biases ahead of time. That behavioral risk side of things can impact long-term financial outcomes and we see it in all the data and evidence. Luke's example of two years sat in cash and missing out on any potential upside can be detrimental. Likewise, if people try and market time while all the data shows us we can't do it. It doesn't work. It's not an efficient and appropriate approach for most people.

Anick:

Having a plan in place, it beats any product you might look at any fancy way to try and invest the portfolio powers of planning. That is such an important concept. But having that clear plan in place then then that helps us to align that asset allocation and and be very precise with with where we're going to move our money to Now within that portfolio. It's important to remember that there are going to be inevitable ups and downs within the market mix, so part of the thing that we do is kick the tires on it. Luke mentioned or Luke went through the cash flow before, and it's violent. That financial planning software is absolutely great. You can go into incredibly granular detail and create all sorts of scenarios, what-ifs, go to town on the expenditure. We like to use it with another bit of kit and I'll show you this in a moment. But this is really useful, especially for withdrawal strategies, because we can make sure that the asset allocation mix is appropriate and it's optimal for your lifetime consumption, essentially. So let me just fire this up now.

Dr James:

Just while Anik is doing that, everyone I just wanted to mention there will be the opportunity for some Q&As at the end, which should be coming up in about 10, 15 minutes' time. So if anybody does have a question, feel free to pop it in the chat. It'll be on a first-come, first-s, first serve basis and I've got a few questions as well, actually, that I'm going to throw out there which I think will be valuable. Should be coming up to that very soon. And another thing to add, actually just for everyone who is in the audience tonight you know it's a real how can I say this? Uh, it's one of those decisions. You know it's so pivotal to our life, but a lot of people just seem to kind of meander into it or dreamwalk into it, like I had.

Dr James:

I remember one guy that I was talking to and we were talking about the sales practice and he said to me james, you know what they tell you about when you sold your dental practice, so you know what they don't tell you, sorry about. When you sold your dental practice. You have no cash flow afterwards. And I was like he almost said it with a sort of sort of semi-j, but I could tell that he maybe just hadn't realized just quite how impactful that lack of cash flow that he then subsequently had after that event Well, it became clear only really actually sold the business.

Dr James:

And that's the whole point of all this stuff that Luke and Annick are talking about tonight. It's how can you take that lump sum of cash and extend its lifespan in such a way that you can reliably generate a certain level of cashflow from it. And then, obviously, what that means is well, that's replaced your business in the sense that it provides you cashflow, which is very difficult to do on your own. That's where all this software comes in and the expertise of a financial planner comes in.

Anick:

Yeah, exactly, james, using where it comes in and the expertise of a financial planner comes in. Yeah, exactly, james, using a a bit of kit, whether it's what luke shared this before or what I'm about to show you now. It's a tool in our armory to to try and get the best possible outcome and to get to a reasoned conclusion of what the most optimal approach is. So I'll walk you through this example. But timeline works broadly on a higher level perspective, so it's not as granular or doesn't work as well being as granular as what Luke went through, with all the different assumptions, expenditure and so on. Where it does work is kicking the tires to see what about if I started my investment journey in 1928, for example. Now we can see it here. It's showing the historical analysis. I'll walk you through it. Essentially it looks back over every single data set. We have, say, 110 years of history across circa 700 scenarios. So what this means is we can look at the various events through history. Luke mentioned before about geopolitical events and that putting people off from investing. One of the challenges I get, or clients sometimes say, is Anik, but this time it's different and it can often feel it is the case. The news is all doom and gloom and it's always this event or that event. Now, when you look at the data, markets continue to to rebound and markets continue to reward long-term discipline. So, as investors, for the most part, sitting tight and riding those storms and it will be a bit of a storm depending on how we decide to allocate our money. Well, if we can sit tight, then our patients will be rewarded, and we'll have a look at some charts in a moment to have a look at this. So this is John and Jane. So they've received their proceeds, net of tax, of £2 million here. We've allocated it into a 60% equity portfolio.

Anick:

So the decision with what portfolio to invest in it's quite complicated. So we at Vidae adopt a three-dimensional approach. So the first is risk-need, and that's very important. That's, what rate of return? Do you need to never announce money? Now? Luke mentioned some of the assumptions when he went through the cash flow, but within each account, there is a growth assumption. So depending on what that risk need is will then depend on what a portfolio we use and then what assumption we use as a consequently so risk needs a mathematical construct and if we need to have a try and go for an expected return that's not achievable, then there's a conversation there. But if the expected return to deliver our cash flow, our future life, the holidays, the gifts, the spending it, the living, your vision, then that informs us on that first factor.

Anick:

The second dimension is risk capacity and that's our ability to withstand short-term losses. So let's say for a moment, retirement selling a practice. We're going to take it all out as a lump sum and spend it in one hit for argument's sake. Now, if we had invested that money and markets had dropped by 20%, let's say that's a bit of an issue if we're going to withdraw it in one hit now, having the ability to withstand those short-term losses. It's important because what people fail to remember is that retirement's not a one-off event, it's an ongoing journey. So while someone might look at selling a practice in their 50s, like Luke said, we financial plan for people until age 100. So in that situation, what about the next 50 years of living? What about the next 50 years of living when we put it or frame it in that context? Quite frankly, it doesn't matter how much markets go down over a week, a month, a year, five years, 10 years, when we've got 50 years in the equation.

Anick:

And then the third point, or third dimension, is attitude to risk. As you may know it, we like to call it risk comfort because we view is how comfortable you might feel with volatility, essentially so we could create the most optimized portfolio on a spreadsheet. Great, the risk need is is appropriate. The risk capacity is suitable too. If it keeps you worrying every night and you're not able to sleep and the portfolio every movement you're scared, then that's not really a great or optimized portfolio. So having something that you're comfortable with, that meets the risk need and risk capacity is where we come at.

Anick:

So, coming back into this example here, the 60% equity portfolio we have for this £2 million investment, this is in line with the client's risk comfort alone. Now, quite often, traditional advisors will have you complete a risk-based questionnaire and it'll come out at some sort of scale, or it'll say you are a cautious investor or aggressive, or moderately balanced, or whatever that means. And portfolio decisions can often be based on these descriptors, which, in our view, it's not enough. Psychometric questionnaires and that subjective nature, depending on what's happening in that moment, can heavily influence the portfolio allocation. And if it hasn't been tested mathematically using these models, then we can quite easily be setting ourselves up for failure. So, coming back into this situation, two million pounds has been invested according to their risk comfort, which is a 60% equity portfolio.

Anick:

Now, if we have a look at some expenditure, like Luke says, we have a few different phases. So, early retirement, as at 2025 so they've just sold and the money has just been invested they're going to be spending 120120,000, inflation adjusted until 2035. From 2035 onwards until 2050, sorry it drops to £80,000. As they approach that later retirement, things start to slow down a little bit, but not completely. And then from 2050 onwards, it drops to £55,000. It becomes harder to get down the stairs, never mind flying long haul across the world. As Luke mentioned, this is typical. We see expenditure trail off in later life. There's also a gift. So £60,000 they want to give to the kids at 2031. £50,000 they want to give to the kids at 2031. So, coming back up here, we can see it's saying that the plan is not very sustainable.

Anick:

So when we look at the further detail, we can see out of those circa 700 scenarios, in 437 of these scenarios so 63% no problem at all the clients get to age 100 without running out of money. However, in 260 of these scenarios, or 37%, they actually run out of money. We'll have a look at some charts in a moment. This is insightful, particularly as people give those concerns. This time is different. Or what about insert new geopolitical events?

Anick:

Now, throughout all these scenarios we can see a bit of commentary here. So the worst case scenario so if these clients had started their investment journey in 1915, by age 59 they would have run out of money. Now the median scenario, so the 50th percentile, some would say the most likely then they would actually be in all right at 1.7 million by age 100. Then we can see at the far right here the best scenario if they had started their investment journey between January 21 and January 72, they would have ended with 25 million adjusted for inflation. So we're getting a feel of what the different range of outcomes are within this scenario. But just to give you a bit more context here, this is across world wars, pandemics, covid, hyperinflation and various other geopolitical events. So we can we can actually look at every single year, um, and how this looks.

Anick:

Let me just take a few of these lines off because it gets quite messy. So, looking each line here represents a single year. Start from the current age 49 with that two million pounds invested across their lifetime at the bottom, and we can see how different investment journeys result in different pots at the end. So, for example, let's just take a random line. So if they'd started their investment journey in 1922, and these are actual returns delivered then they would have actually been very well off. The line goes off into the chart, but they end at age 100 with circa 10 million pounds. So when we overlay all of this together, we can start to see okay, what's the median, the 50th percentile? Well, looking at all 110 years of data, things actually look pretty good.

Anick:

Yes, it's not as sustainable as it can be be, and we'll come on to that in a moment but this is. It's very useful to see what the journeys would have been, because as financial planners, we plan for the worst and everything else is upside. So in this scenario, we can quite clearly see this red line demonstrating the worst case. So they started their investment journey in 1915. That £2 million was invested in that 60% equity portfolio as per their risk comfort. They're running out of money by 5960. This assumes it's inflation linked to no ongoing reviews and so forth. So in reality, it wouldn't have happened that way. But we can layer in the best case scenario and then the, the likely range of returns. So this helps to narrow down on what those, those range of outcomes are and the likelihood of of the, the financial success, living, living out your vision, doing the things that you want to do.

Anick:

Again, the portfolio powers the plan, but having that in place it's important to to to make the most out of life. Most people don't really care about how a portfolio is invested or what wrapper it is or the technical aspects to it. They care about taking the kids away and and doing what they enjoy. So we we can look at a few other things now. If we were to invest as per their risk need say 80% portfolio, and we tail this with Voyant, the software Luke used before, we can calculate that risk need exactly, but assuming that we increase the exposure to match their risk need, which we can do here. And then the other thing is we've assumed the life has been inflation adjusted. So every year, no matter what, the withdrawals will increase by inflation to keep up in real terms. Now, realistically realistically, when markets are falling, people don't tend to have an inflation adjustment. At the very least it stays the same and when markets pick up then we might look to catch up that inflationary increase. We call that mechanism a guidance inflation adjustment. Sounds slightly jargony, I know, but by applying it we can quickly see the impact of how it might make things look. So if we go back to the overview now, we can see that we've gone from about 61% of 61% of scenarios and things were looking okay so now 82%. Now things look quite a lot different, so this represents a great outcome.

Anick:

Now most people will need ongoing financial planning. I describe it to my clients. It's a bit like saying you're driving from London to Edinburgh, you've set that financial plan, you've set your sat nav, but your phone dies. Um, your your, there's a road closed sign happens as life throws its inevitable curveballs. Essentially, it's easy to become lost on your journey on the route if you don't check in regularly. And this is what the ongoing value financial planning does having that objective sounding board here to make sure you're on track. And by making adjustments in a couple of years, if we decide not to increase the withdrawals or amend the withdrawal strategy along the way, then we can make sure we get to the plan end, ensuring things are optimized.

Dr James:

Essentially, I feel like that was my monologue there now.

Luke:

Yeah, no, it's great. Thank you so much, annick. Just sorry, can I, if you just hop into charts and tools for two seconds, um, and then go to the longevity chart? Um, it's just. That's also interesting context because, although we ended there with, it was at 81 percent uh probability of success, using historical data, um, that's on the assumption that the person's going to live a very long time in retirement, um, and so actually there's also always worth uh remembering that you might not live to age 100, um, and uh, this is just an extra that overlays, kind of the life expectancy, so the probability of you surviving and the portfolio being sustainable, and I just always think that's an extra um kind of way of looking at it yeah, 100% interesting.

Dr James:

Thank you so much, guys. Uh, great presentation and a lot of learning points. I actually had a quick question which we should just about have time for, because we've got nine minutes until half eight, which would take this webinar to an hour overall, which is what we usually aim for, and it was on trusts, because I feel like a big question that a lot of people ask whenever it comes to retirement planning is that they've heard of a trust. They feel like it's something useful that will be able to safeguard passage of their wealth from themselves to their kids and by way of tax mitigation. Is that correct? Have people got the right end of the stick? And, if so, maybe if you could share some of the different types of trusts or just a little bit of info on that front, that'd be really useful. Either luke or annick a.

Anick:

A trust is a completely separate entity, just as your company is a separate entity, and it can be very easy to be fixated on the trust. I must put my money into a trust, but a trust is a solution to a problem and it's one of many solutions. So the starting point is to work out what the problem is, what the inheritance tax issue, or potential inheritance tax issue, is likely to be. Now, if there's a surplus, which will be identified using the cash flow model, then we can look at the most appropriate way of dealing with it. Now that might be direct gifting, but people might not want to give family members, kids, that level of capital at a young age. They might not feel responsible for it.

Anick:

So for some people, if the conditions are right, allocating that capital into a trust can be a useful, a useful thing to do because it's earmarked for the future use, future beneficiaries a bit of jargon return, um, when the trustees deem it suitable to distribute that money. Now there are all sorts of complex rules around how you put money into the trust and the order of it and the different types of settling into a trust, all of which have varying tax treatment. So if that is something you're interested in, absolutely take professional help, because if you get it wrong, it's going to be incredibly expensive and it's going to be a pain um for your, for your estate to administer. Now, depending on how you want that structure and what you want to do, that money and your wishes for it might lend itself to the sort of trust you'll use.

Dr James:

Essentially, but, summarizing it, it's just a tool to to cascade money efficiently if it's used within the right context yeah, because I feel a lot of people come enter the conversation with a financial planner on the basis that they'd like a trust, but it's often because they perceive that to be the best way to achieve what they'd like to achieve. But it's not necessarily the case and actually, whilst that is the conversation initiator, what it can be helpful to remember is that there are other options out there, which is really cool. So, yeah, I'm sure we can make a whole webinar about that in and of itself. Oh, great question just before the final whistle about that. In and of itself. Oh, great question, just before the final whistle. Oh, I think we've got six minutes to quickly talk about family investment companies, don't we guys?

Anick:

So for a family investment company, that's a series of webinars we're not going to get this in in five minutes now but essentially teresa, exactly the same principles. So what's the issue we're trying to solve? For most people, that is inheritance tax. As business owners, company owners and individuals might be more familiar with the, the corporate structure of a family investment company, but is is trying to do the same, the same sort of thing, but within a different structure, and family members can have share classes and you can bring people on when it when they're ready to. The thing to remember here is that it will operate as any company, so you need directors, need people, people managing it and the costs are high. Typically you wouldn't look to do it for money less than 3 to 4 million, given the initial costs up front and ongoing. But yeah, absolutely, a family investment company can be a great solution within the right circumstances and if the situation lends itself to that solution.

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Dr. James Martin

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