IMPORTANCE OF INCOME
I had dinner the other day at a friend’s house. He’s the founder of a successful business that has grown 20% a year for the past decade. Now his son who he brought into the business to help him run it wants to sell the company. It’s causing friction in the family. He asked my opinion and I told him it would be a mistake to sell a growing company that provides him steady income. He owns 40% of the company stock so he’s worried that the board might listen to the son. My advice was to tell them he would refuse to sign a covenant not to compete which any buyer of the company would require. That would kill the possibility of a sale.
My friend is 65 years old. He could easily live another 25 years. The most important financial consideration for him is income. If his company were to be sold, he would get a pile of cash, but his income would stop. That means he would be living off of capital. That change could eventually cause him consternation. As a retiree’s capital diminishes, their lifestyle is likely to change. Their spending habits are altered. They may have to sell assets to raise money to live on. You look at things differently when your income stops. It’s the most important financial consideration for every aging person.
Social security helps, but it’s not enough. Dividends, pensions and annuities are important contributions, but long term, they may be eroded by inflation. Many retirees continue to work part time. It’s helpful to have assets that appreciate dramatically and can be sold from time to time. However, sometimes those type of assets can cause a reversal of fortune during a decline. Everybody’s situation is different and there’s no formula that fits all. The lucky ones have so much money they are impervious to income concerns. Many people getting ready to retire don’t adequately understand the importance of income. The longer you live, the more important it becomes. It’s something everyone needs to think about when making financial decisions.