Dr James, 1m 43s:

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. Anick Sharma, who represent Videre 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 you 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. As ever, you can claim your CPD for this episode within the official Dentists who Invest Smart Money Members Club. Smart Money Members Club also includes multiple mini courses and webinar series on finance for dentists, including how to become as tax efficient as possible, as well as understanding investing. All of this content comments as verifiable CPD, and you can download your certificates there and then upon completion of each lesson. In addition to this, we also include a whopping 10% discount on your dental indemnity and a 5% discount on lab bills for dental principals, amongst other perks and discounts for members. Please use the link in the description to claim your verifiable CPD for this episode. Alright, 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 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 clue's there already. Like the accountant is just there to minimize tax, maybe a little bit of tax planning as well. But what about how we get the cash to first of all, well, uh protect its value as in as in protect it against inflation? Uh, 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. Anick Sharman. Both of those financial planners represent Federe financial planning, and we're all here today to learn about what we can do beforehand when it comes to selling the dental practice, during selling the dental practice, and after as well. Luke, Anick, anybody like to step up and take the lead from the get-go?

Anick, 4m 49s:

Hey everyone. Um, yeah, so it's a selling practice, selling your business. It's such a huge emotional and life-changing event. It's that whole adage of failing to prepare. Um it's really important to get all your ducks in a row and not rush into anything. So plan, protect, and invest. The opportunity cost of brushing into any irreversible changes versus say going into some sort of suboptimal allocation or locking money away, it's not worth it. It's it's so important to get everything sorted, give yourself the space, the breathing room, and plan each decision diligently. Um, we don't want to be going chasing the the best rate or the best fund or whatever that even means from day one. Now, we will come on to a cash flow model later on. Um, 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 do 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 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 as it should be. Now, even before we get to sale date, 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 owner of Lions. 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. Um, 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 uh share sale. Are you gonna structure it with a deferred um payment or is it gonna be an earnout over X period of time? Now, depending on what options you choose, that's then gonna 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 gonna have implications on tax and and and so on. What's really important here though is understanding your number. And it 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 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 a a 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. 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're tying themselves up in knots with a situation that didn't need to be there, adding a load of stress when it 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 place 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, 9m 18s:

Yes, I do. Let me just uh share my screen. Just whilst that's loading, um, one thing that struck a chord as you were talking there about the importance of um taking your time post well, pre-amp post-sale, but i in particular in particular post-sale, not rushing into decisions. I 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, in somewhere relatively secure. But then they're um overcome with analysis um paralysis, uh, where I've I've seen it as bad 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 it there's a particularly around timing on in the markets. Some people get very caught up in that um concerned. Is this the right time to invest or what happens if X, Y, and Z uh insert geopolitical event um that you know, 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 see be on the opposite end of the spectrum where the money's sat there uh being eroded with inflation, like James mentioned at the start. Um, let me just find the right screen, screen number two. And hopefully.

Anick, 10m 58s:

Yeah, we've got that. I can see why.

Luke, 11m 0s:

Great. 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 um from the point at which we meet them through to uh unfortunately planning for for when they pass away, albeit we uh we run these plans until people uh are age 100 because we don't know what the future brings. So what's on the screen at the moment is is a is a timeline. Now, this is uh for for two clients looking to sell a practice, uh, 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 uh retirement into different phases. The reason being, um, 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 um different phases. Uh, you're going to require different, different sums of money. Typically, in the earlier phase, you'll require more money, you're more active. Um, 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 you know spending slows as you slow. Uh, and you might see it uh potentially plateau. There is evidence to show that you you spend considerably less in your 80s than you do in your 60s. So it wouldn't be right for us to plan for uh a flat um level of spending all the way through. So what we do is we we put a timeline together for a client. This is different for every client. Um, we put various markers for different events. So on here, you've got their son graduating, uh, sorry, starting at university and then graduating. There's a gift here, I believe, um, that they want to make to uh to their son. Um there might be markers for different events, financial events. So this is the the commencement of their 2008 NHS pensions. Had they membership in the 2015 section, there would be a marker on that for that event starting at their normal pension age. Uh, we have slowing down at age 80. We have additional care costs at the the lot in the last five years of life, because again, as I said, although spending might plateau, there is a tends to be a spike in in somebody's later years. Uh, and then we've got here Financial Independence Day, um, the point at which they want to be able to sell their practice. Uh, and so uh somebody's plan, uh everybody's plan looks slightly different. Uh, but we work with clients to to work out what their vision is and 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 you envisage spending money on in the future. But that's having a proper plan, that's having a clear time timeline of events that are going to um, in in your ideal scenario, take place between the point that you start the process and and uh passing on. Um so once we've worked out what the timeline is, we can then work out what certain costs would be. 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. Um, but this client wants to aim for uh £100,000 uh every year to fund their lifestyle. And that, as I said before, everybody's lifestyle is different. I've met clients that are very um conservative with their spending, and I I've taken on many clients as well who are you know have have quite lavish lifestyles uh and uh you know enjoy uh higher levels of spending, and it's about tailoring the plan to meet 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 cost, uh, a thousand pounds a week per per person in care. Um, that's again a very prudent assumption. Um typically most people don't go into care homes, and if they do, they don't go for five years. Uh, but we would always um be very prudent in how we uh make our assumptions and cautious. So once we've decided what the vision is and what the objectives are, we we can plug in what somebody's financial situation is, we can talk about um 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, um, or you know, the the practice building. They uh have a small amount in ISIS, they've got a main residence, uh, 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 for good reason. I'll come back to that in a moment. They've got two modest SIPs, which they're still funding, NHS pensions, they've got state pensions, which is a ball state pension at the moment, is just under £12,000 per person per year. Um, 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. Uh, i.e., where is the every year? So these lines here all represent an individual year's worth of spending. Um, where is the money going to come uh from as they move throughout their retirement? And on this plan, you've got the pink, which is their free the freehold rental income, um, 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 and they benefit from the rental income throughout. They've got the the navy blue here, which is their state pension. Uh, they've got the green, which is NHS pension. Um, 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. 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. Um, you can see the spike in the later years for care costs. You you can see the drop down here for the point at which they're, you know, we're assuming they they're going to be spending less money in their equities. Um, 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. Um, this looks fairly messy, and that's because they're taking money from uh SIPS, which is is is uh really the the the tax burden is is is potentially higher there because it's not optimized in terms of their withdrawal strategy. Um 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 got that position, we can actually uh like Annick said, we can we can actually work backwards and see well, what does the client actually need in terms of um a sell proceeds at the point of wishing to sell? So this client, for example, if they were to sell their practice at age 55, uh, we can use the calculator to work out what amount of money they need net of tax in order to remove um any shortfall. And that conveniently produces a nice round figure that we know that actually if they were to raise those proceeds um from the sale of their practice net of tax, that doesn't include um capital gains tax uh on the on the sale proceeds, um, but it it gives us a clear idea of what what they need to bridge any shortfall. Um the second half of the equation to go back, so let me just assume that we just come back in here and say that the practice goodwill is actually worth one million pounds. Now when we come back in here, we can see that the shortfall has been reduced. So cash flow is half the equation. Um, and in truth, this hasn't been optimized in terms of a tax efficient withdrawal strategy. It's it's simply there as an example. So there would be work done to ensure that um drawing down on the assets is as tax efficient as possible. That's part of financial planning done properly. Um but the second half of the equation is what does what does that then look like in terms of a client's overall asset position? Um, what's 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? Uh, that's currently in real terms. Um but the because they're potentially accumulating wealth because they hold on to quite a lot of illiquid 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? Um, ensure that that security is provided. Um part two, what does the future look like in terms of their potential uh uh inheritance tax liability and and where how comfortable are they with the amount of money that they stand to pass onto the the government on death as opposed to their their heirs and beneficiaries? Um so it's about dealing with uh 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, um, because your options are slightly narrowed, um, particularly around um certain trust planning. Um so the other uh, and this this tool is fantastic, there's all sorts of things that we can model. Um, inheritance tax, for example. Um, what's the potential inheritance tax liability for a client over time? How's that likely to change? Well, uh, when you sell your business quite significantly, because if you've got a trading business, um then uh that trading business, albeit there are the rules are under review and changing um in the not too distant future, in terms of the the the actual final details around this, but your trading business uh does bring with it uh inheritance tax efficiency. As soon as you sell that trading business, that money's gonna be poured into your estate and your potential IHT liability or your children or your family's IHT liability is going to increase. Uh, 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 um a series of different actions that you're gonna take, um, that you're gonna carry out throughout the course of retirement in order to deal with that IHT liability. So um really powerful technology that we use to deliver these financial plans. Um, but as I said, the 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 drill one, there's another plan that I work the terminology I use, which is a cash management plan. So if we're talking about a financial plan being a slightly zoomed out uh view of your your finances and how that will change throughout the course of your life, uh we also need to deal with the the day-to-day spending. Once you've sold your practice and and you've and you've stepped away from work, which might not be immediate, I appreciate if if you're sort of tied in for a uh a period of time. But once your earnings have switched off, you then need to know how are you going to manage um your your generating the income from your assets. Uh and that you know that cash management plan is is is going a bit more granular in terms of the the day-to-day, month to month, year to year. Um it's kind of a more uh focused view of of how to manage that process. Um so that's that's how to um from our perspective, how to work out what your number is and and go into those conversations uh in a more informed way uh to give you that reassurance that you know that you're on the um on the right track and that you're gonna have enough money. Uh and as Annick said, that's gonna also help in those negotiations if you really do know what your number is uh as you're having those discussions. Uh I touched on it in terms of tax. uh uh efficiency there but obviously the the the taxes to be aware of or or uh at that at this the the the point of sale really for me um business asset disposal relief clearly um which is uh had had recent reform and is is obviously become becoming less attractive uh over the next couple of years um but there is uh and uh still a uh a a band there of of um gains that you can have which is subject to a beneficial tax tax rate and it's important that you utilize that um so it's well worth uh speaking with your accountant um or your tax advisor in advance of any sale to ensure that you're gonna get the full benefit from the relief that 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 it does exist. We need to be aware of the rules around pensions um so lifetime allowance the the the rules around that were were changed and and in effect the lifetime allowance was was was uh removed I'm not convinced that that's going to stay that way for for the for the medium to long term given the pressures that the Chancellor is under in in in terms of trying to find cash but um it's it's important to know what that is and and and um should it be reintroduced but there is also rules around how much lump sum you can take from your total or of your pensions tax efficiently so it's important to to plan for that uh inheritance tax I've touched upon it's important to know where you stand from a from an IHD um perspective. Um a couple of other other things in terms of kind of preparing for 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 you need your your um day-to-day accountant may not be the best person to advise you over the the potential uh tax um pitfalls and and traps that that that you you know you might encounter and that you need guidance through they may well be I'm not saying that they they can't be yeah 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 uh uh that's gonna deal with um the more complex tax advice that's that that could be required um so make sure you've got the right the right advice and the right advisors um and get that help in advance of any practice sale to ensure that the as Annick said that the the practice is as in good a shape as as possible to get maximum value for it um from the the the business that you've built up um another quick reflection i i know i feel like i'm slightly uh on a bit of a monologue um but uh another reflection is prepare yourself emotionally for the sow of your business i see this a lot um it's a it's it's a financial transition which needs planning uh but it's also a a life transition uh which can also be quite unsettling for some people um uh 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 the long term what they want from life um it's it's not just about the cash flow model it's also you know kind of life after life after business um what it's not it's it's not just the money um so yeah a few reflections there um if I can pass back to Anick UK dentists Dentists Who Invest now has an official platform where you can learn about finance and obtain UK compliant verifiable CVD at the same time the only platform that exists on which you can do both.

Dr James, 27m 35s:

The Smart Money Members Club has hundreds of hours of mini courses webinar series and live day recordings on all things finance slash tax efficiency for UK dentists. This includes complete courses on how tax works for UK dentists finance so that you can invest and grow your own money business so you can improve your profitability as an associate or principal and for those out there that want it there's also a mini course and how you can responsibly enter the crypto space using measured amounts of capital. I've gathered this content from the best of the best I could find in each respective area so that you know that this is how people at the forefront of each field advise their clients. The Smart Money Members Club also contains discounts on common things that UK dentists need to pay for on a regular basis. This includes a whopping 10% discount on dental indemnity the offer to beat your income protection deal no matter what you're paying and for the principals out there 5% discount on lab bills and 10% discount on practice insurance. These are designed to offer hundreds if not thousands in annual savings. The purpose of this members club is to not only boost your monthly income but also manage your outgoings as much as possible and therefore create more profit. To celebrate the launch of the Smart Money Members Club and given that the CPD deadline is coming up soon I've decided to offer the first month of this platform entirely for free. This offer will end in the coming weeks as soon as the current CPD cycle is up. To collect your CPD for this podcast episode using the Smart Money Members Club feel free to use the link in the description of this podcast thanks Luke um useful to to see the cash flow.

Anick, 29m 18s:

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 had experienced people come to me to to help them sort out their arrangements just as you've been through there. But quite often coming after the capital event can reduce our range of options um a capital event one time once in a lifetime chance to to get things right um I appreciate some people might decide to go again but for the for the most part um 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 um it we've said at the start Luke said it there but planning is so important to get everything sorted during the transaction as well certain mechanics um Luke mentioned about the emotional aspect of it going through an earnout 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 it's it's not going to be easy they might start doing things in a different way than you think is best so it it's important to 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 and depending on how that earnout might happen tax considerations business asset disposal relief etc um stage investing depending on when the different tranches are are received so having a clear plan of what's due that money is so important. And then that Luke mentioned there about narrowing down tactics of cash the actual mechanism of it is something that can often be overlooked everyone 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 you don't want the the capital proceeds to be paid into a current account so the the very first step move it into a savings account create an additional layer of security barrier um your existing bank will likely pepe you with phone calls when they see a large lump sum um enter your bank so Luke talk spoke about um analysis paralysis before and it can quite often be overwhelming with with what to do and all the options. The 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 in between minds of what to do. On the security of funds this is it's an important one so most high street banks will have a thing called the financial services compensation scheme. So this covers £85,000 per banking license now if we're talking about a seven figure exit £85,000 is not likely to cut it so securing the money is so important. Now people often kick back and say Anick don't be stupid insert well known high street bank is never going to go under well said the same about Credit Suites SVB Lehman Brothers and we know how that all ended so that banking license risk can be mitigated. So think about having money across various banking licenses um different accounts there is a temporary high balance um which could be useful the other thing is the use of um NSNI national savings and investments so that is it's essentially a a a range of accounts backed by the Treasury so whilst the rates aren't as competitive um 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 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 you've had a chat with your planner someone to look at the cash flow model and you have a clear plan of how money's going to be held in the short, medium and long term and that will help help identify what to do essentially um wills the 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. Then moving further along after those first couple of weeks start to think about a cash flow louder so 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 um you might be treating yourself to a new car whatever it might be clear expensive debt to ring fence have that emergency buffer that that just in case fund then after that a couple of years worth of expenses say it's probably an argument to then look at the investment piece. James mentioned it right at the start 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 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 capital that you've received. It's important to acknowledge these biases ahead of time and 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 and missing out on any potential upside can be detrimental. Likewise if people try and market time well 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 having a plan in place it it it beats any product you might look at any fancy um way to try and invest the portfolio powers of plan and that is such an important concept but having that clear plan in place 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 with within that portfolio um it's important to remember that there are going to be inevitable ups and downs within the the the market mix. So part of the thing that we do is kick the tires on it. Luke mentioned well Luke went through the cash flow before and it void 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 it we like to use it with another bit of kit um and I'll show you this in a moment but this is really useful especially for withdrawal strategies because we can we can make sure that the asset allocation mix is appropriate and it's optimal for for your lifetime consumption essentially so let me let me just fire this up now.

Dr James, 38m 27s:

Just while Anick is doing that everyone I just wanted to mention there will be the opportunity for some QA's 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 serve basis and I've got a few questions as well actually that I'm gonna 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 I remember one guy that I was talking to and we were talking about the sale of his practice and he said to me James you know what they tell you about when you've sold your dental practice or you know what they don't tell you sorry about when you've sold your dental practice you have no cash flow afterwards and I was like he almost said it with a sort of in sort of semi-joking 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 will it became clear only really actually sold the business. And that's the whole point of all this stuff that Luke and Annik 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 cash flow from it. And then obviously what that means is well that's replaced your business in the sense that it provides you cash flow 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, 40m 23s:

Yeah exactly James using a a better kit whether it's what Luke shared us before or what I'm about to show you now it's a tool in our armory to to try and to get the best possible outcome and to get to a reasoned conclusion or of what the most optimal approach is. So I'll walk you through this example um but timeline works broadly on a 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 and 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 and I'll walk you through it. But 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 an IC, 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 those storms and it will be a bit of a storm depending on how we we decide to allocate our our money well if we can sit tight then our patients will be rewarded and we'll we'll have a look at some charts in a moment to have a look at this so this is this is a a uh John and Jane. So they've received their their proceeds an of tax of two million pounds here we've allocated it into a 60% equity portfolio. So the decision with what portfolio to invest in it's it's quite complicated. So we at the Dair adopt a three dimension approach so the first is risk need and that's very important that's what rate of return do you need to never allow out of money. Now Luke mentioned some of the assumptions when he went through the cash flow that 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 if we need to have a try and go for an expected return that's not achievable then then there's a conversation there. But if the expected return to deliver our cash flow our future life um the holidays the gifts the the spending it the living your vision then that informs us on that first factor 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 the practice we are we're gonna 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 the markets had dropped by 20% let's say that's a bit of an issue if we're gonna 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 a one-off event it's an ongoing journey. So whilst 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 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. 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 as how comfortable you might feel with with volatility essentially so we could create the most optimized portfolio on a spreadsheet great it the risk need is is appropriate the risk capacity is it is suitable to if it keeps you worrying every night and you're not able to sleep and the the portfolio every movement um you're you're scared then that it'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 is where we we come at. 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 happened 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, £2 million has been invested according to their risk comfort, which is a 60% equity portfolio. 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 £120,000 inflation adjusted until 2035. From 2035 onwards, it until 2050, sorry, it drops to 80,000 pounds. As they approach that later retirement, things start to slow down a little bit, but not completely. And then from 2050 onwards, um, it drops £55,000. Um, it becomes harder to go down the stairs, never mind flying the 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 uh 2031. So coming back up here, we can see it saying that the plan is is not very sustainable. So when we look at the further detail, we can see out of those circus 700 scenarios, in 437 of these scenarios, so 63%, no problem at all. Um 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. And we'll have a look at some charts in a moment. This is insightful, um, particularly as as people give those concerns, this time is different, or or what about insert new geopolitical events. Now, throughout all these scenarios, um, we can we can see a bit of commentary here. So the worst-case scenario, so if these clients had started their investment journey in 1915, um by age 59, they would have run out of money. Now, the median scenario, so the 50th percentile, um some would say most likely, um they would actually be in alright. Uh 1.7 million by age 100. Now we can see at the far right here, the best scenario, if they had started their investment journey um between January 21 and January 72, they would have ended with 25 million um 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, covet, hyperinflation, and various other geopolitical events. So we can we can actually look at every single year um and how this looks. 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 2 million pounds invested across their lifetime at the bottom. Um 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. Um the line goes off into the chart, but they end at age 100 with circa 10 million pounds. So when we overlay it all of this together, we can start to see, okay, what's the median, the 50th percentile? Well, we're looking at all 110 years of data, things actually look pretty good. Um, yes, it it's not as sustainable as it can 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'd started their investment journey in 1915, that £2 million was invested in that 60% equity portfolio as per their risk comfort. And they're running out of money by 5960. Um, this assumes it's inflation linked and 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 financial success, living, living out your vision, doing the things that you want to do. Again, the portfolio powers of plan, but having that in place is important 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. Um if we were to invest as per their risk needs, say 80% portfolio, and and we we tail this with Voyant, the software Luke used before, we can calculate that risk need exactly. But assuming that we we increase the exposure to match their risk needs, um, which we can do here. And then the other thing is we we've assumed the wife has been inflation adjusted. So every year, no matter what, the withdrawals will increase by inflation to keep up in real terms. Now, realistically, when markets are falling, people don't tend to have an inflation adjustment. Um at the very least, it 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 or no. But by applying it, we can quickly see the impact of how it 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. Um now most people will need ongoing financial planning. Um, I describe it to my clients. It's a bit like saying you're driving from London to Edinburgh. You you've you've set that financial plan, you've set your sat nav, but your phone dies. Um your your you there's a road close 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. Um ensuring things are optimized essentially. I feel like that was my monologue there now. No, it's great.

Dr James, 54m 29s:

Thank you so much, Anick.

Luke, 54m 31s:

Alec, just 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 what was it, 81% uh probability of success using historical data, um, that's on the uh assumption that the person's gonna live a very long time in retirement. Um and so actually there's also always worth uh remembering that you might not live till 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 an extra um kind of overlooking it.

Anick, 55m 23s:

Yeah, 100%.

Dr James, 55m 26s:

Interesting. 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 trust or just a little bit of info on that front, that'd be really useful, either look or Anic.

Anick, 56m 15s:

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 a 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, um, 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. 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 treatments. 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 for your estate to administer. Now, depending on how you want that structured and what you want to do with that money and your wishes for it might lend itself to the sort of trust you'll use essentially. But summarizing, it it's just a tool to to cascade money efficiently if it's used within the right context.

Dr James, 58m 10s:

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, it can be 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, and I'm sure we can make a whole webinar 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?

unknown, 58m 50s:

Yeah.

Anick, 58m 51s:

So for a family investment company, that's a series of webinars. We're not gonna get this in in five minutes now. But essentially, Theresa, 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, um, individuals might be more familiar with the the corporate structure of a family investment company. But is it's 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 uh as any company. So you need directors, you need people managing it. Um and the costs are are high. Typically, you wouldn't look to do it for money less than three to four million, um, given the initial costs up front and ongoing. But yeah, absolutely. Family investment company can be a great solution within the right circumstances, and and if the the the situation lends itself to that solution.