How Much Do You Need to Retire From Your Business?

The Quick Math: Your Retirement Number

Use the 4% rule as a baseline. If you want to spend $200K per year in retirement, you need roughly 25x that — $5M — invested in a diversified portfolio at exit. The 4% rule is not perfect; it was developed for 30-year retirements based on historical US returns. But it is the simplest starting point and most fee-only financial planners use it as a baseline.

Now adjust. Most business owners overestimate how much they will spend in early retirement (travel, hobbies) and underestimate how much they will spend later (healthcare, long-term care). The real number is rarely a single line on a spreadsheet — it is a range that accounts for both, which is why getting your business exit number right matters as much as getting the valuation right.

Working Backwards From the Sale

The proceeds from selling your business are not the proceeds you keep. Here is how a typical $5M sale shakes out for an owner with no remaining business debt:

• Gross sale price: $5,000,000
• Transaction costs (broker, legal, QoE): -$300,000 (6%)
• Federal capital gains tax (20% LTCG, with QSBS or installment planning sometimes lower): -$940,000
• State capital gains tax (varies; using 5% blended): -$235,000
• Net Investment Income Tax (3.8%): -$179,000
• Net to seller (cash at close, no earnout): ~$3,346,000

That is roughly 67% of gross. If your deal includes a seller note (paid out over years), an earnout (contingent on future performance), or rollover equity (kept in the new company), the cash actually arriving in your account on day one is even smaller. This is one of the most common reasons sellers' retirement plans miss — the number on the LOI is not the number that funds retirement. For more on how deal structure affects what you actually take home, read how an LOI is structured.

The Healthcare Gap

If you sell before age 65, you face a healthcare cost gap that catches most sellers by surprise. COBRA covers 18 months at full cost (often $2,000 to $3,000 per month for a couple). After that, ACA marketplace coverage runs $1,500 to $2,500 per month for a 60-year-old couple, depending on income and state. Healthcare alone can consume $25,000 to $40,000 per year between exit and Medicare eligibility — and that is before any major medical event.

Plan for at least $30,000 per year in healthcare costs from exit to age 65, and another $8,000 to $15,000 per year per person for Medicare premiums and supplemental coverage from 65 onward.

Lifestyle: Be Honest About What You Will Actually Spend

Most business owners cut their spending in the first year after exit and quietly reverse course in years 2-4. The "I will just live more simply" plan rarely survives contact with reality, especially if you have been the primary earner for 25 years. The more rigorous approach is to track every dollar you spend in the 12 months before exit and use that as your baseline. Then add: $30K-$40K in pre-Medicare healthcare, taxes on portfolio income (typically 15-25% on dividends and qualified gains), and a 20% buffer for surprises.

A typical SMB owner couple spending $150K post-tax in their last working year often needs $180K-$220K post-tax in retirement once you factor in healthcare and the loss of business-paid expenses (vehicles, phones, travel, meals). At a 4% withdrawal rate, that means $4.5M to $5.5M of investable assets — net of taxes and fees.

Comparing Two Real Sellers

Seller A: 58 years old, sells for $4M cash at close, no earnout. After 6% transaction costs and 28% blended tax, Seller A nets ~$2.7M. At a 4% withdrawal rate, that supports $108K of pre-tax annual spending — well under what they were drawing from the business. Seller A is not retired; they are job-hunting.

Seller B: 58 years old, sells for $4M with $3M cash at close, $500K seller note (5%, 5-year), $500K earnout (50% probability). Same costs and taxes on cash, but only $2M net at close. Seller B has $80K of pre-tax annual income on the cash portion, plus seller note interest, plus expected earnout. Seller B's "$4M sale" funds about $130K of annual spending in the early years and ramps up later — but is highly dependent on the earnout being paid.

Same headline price, different retirement realities. The structure matters as much as the number.

How Your Business Valuation Affects the Math

If your retirement plan needs $5M net and you are going to lose 30%+ of gross to costs and taxes, you need a gross sale of roughly $7M. If your business is currently worth $5M, you have a gap. Closing that gap is exactly what exit planning is for — driving valuation up over 2-5 years through the same levers buyers value: recurring revenue, owner independence, customer diversification, clean financials. Start with a baseline valuation today and a target valuation that funds your real retirement number, then work the gap. The exit planning framework walks through it step by step.

The Forward Plan

Three things to do this quarter:

• Get a real number for your annual spending, based on the past 12 months of actual transactions. Spreadsheets, not memory.
• Get a baseline valuation for your business, and stress-test it for cash-at-close vs total deal value.
• Run the gap math. Net proceeds at current valuation minus retirement need at honest spending. The size of the gap tells you whether you can sell in 12 months or whether you need 36-60 months of value-driving work first.

Most owners are surprised — in both directions. Some discover they could sell tomorrow and be fine. Others realize they need another five years of focused growth to actually fund the life they want. Either way, knowing the number is what unlocks the plan. Once you have it, work backward to the assets and the timing, and you will know whether your business is ready to sell or whether the better move is to build value first.