Exit strategy

Do you have an exit strategy? This was the question that Mrs. CF asked Mr. CF a couple of months ago during a conversation on investments. I was looking at her and glazed over a bit. A what? Was my counter question. An exit strategy? Having focused on increasing our various investment positions, exiting those positions was not really on the top of my mind. But she had a very valid point, when you buy certain assets, you will ultimately get rid of them too. It is therefore important to think about an exit strategy to make this work as smooth/profitable as possible.

Besides an exit strategy on investments, you might also need an exit strategy when it comes to your career. Albeit we are not there yet, (partial) FI is approaching faster than we initially thought. An career exit strategy is therefore really key at this stage, as the impact on our finances is rather larger when income is reduced and expenses temporarily increase (for details, keep reading :-).

Exit strategy maze, Image source

 

Investment exit strategy

Why an exit strategy?

Simply but: life changes and evolves! An investment strategy might no longer fit with your preferences, life situation (e.g. divorce, kids, location independency, age, etc.) or market conditions.

For example, we own some real estate. We currently really like it, but we have also seen older folks that simply don’t want to deal with the risks or potential hassles/works (e.g. repairs/maintenance) when they get older. We have seen various investor trying to offload (a portion of) their real estate investment portfolio due to their age/changing preferences.

Another example is your age/time left on this planet, you might lose your risk appetite and decide to rebalance your portfolio from stock heavy to bond heavy. Or you might want to sell your business/franchise, or have someone manage it on your behalf (so you just receive dividends).

Planning for an exit strategy

Albeit not required in detail during your search for investments, you should considered how easy an asset is to sell. For shares, index funds and bonds this is pretty straight forward. But for real estate, crowdfunding loans, or (internet) businesses/franchises this could be a lot more difficult. It can take time to transition these assets to another owner (or may not be possible at all!). If you have time this is not an issue, but if there are time constraints (say due to a divorce/illness/etc.) you have to make sure your asset is ready to be sold at any given time. However, it also needs to sell for the right price!

What to consider?

Here are a few things which you could consider:

  • Approximate moment from or to a major market crash/correction;
  • Conditions of your portfolio (up/down);
  • Type of assets (Stocks / bonds / Loans / Real Estate / combinations);
  • Your risk tolerance;
  • Age;
  • Health;
  • Family situations (no kids, expecting kids, older kids, pets, etc.);
  • Investment preferences;
  • Location preferences (nomad/stay-at-home/frequent traveler); and/or
  • Housing preferences (rent/buy).

Some exit strategy examples

Here are some random examples of exit strategies, for various investments and stages of life:

Stock market exit strategy, image source

 

  • Index funds; depending on your age, expenses and market conditions, sell one or more year’s equivalent of expenses to capture capital gains. Transfer into bonds to have a stead pot of money to draw from for several years of worry free living. The selection of the number of years you transfer into bonds can depend on how close you think you are towards or from a major market correction (or your age);
  • Keep your rental property in tiptop conditions, so that when a tenant moves out you can sell for a good price on the open market. Or, see if you tenant is willing to buy from you (could save realtor fee’s). Before you sell, decide if and how, you want to reinvest the proceeds (dividend shares, bonds, personal loans, business loans, etc.); or,
  • In case you are older and want to limit inheritance taxes, start selling or transferring ownership of dividend growth stocks to your children, family or charity (e.g. “estate planning”). Same applies to your primary property: sell to you children and rent it back from them for your last few years on this planet (saves lots in inheritance taxes!).

If you have more suggestions, please feel free to leave us some comments!

Career exit strategy

Why an exit strategy?

You never know how life is going to change, unfortunate things happen, so leaving the work force (or changing careers) should be done amicably. Even when you have a horrible boss and cannot wait to never see him or her ever again, the recommendation is to finish off professionally. It’s often a small world, and it could make a difference! References can really aid you in the long run, even outside your current career path.

That being said, handing in the resignation letter is relatively easy. How to do write it and what you are going to do afterwards can be less straight forward. Its needs a plan, it needs an exit strategy.

Planning and an example

Depending on what you want to do after your current career, timely commencement of your planning could be important. Take our case, I (Mr. CF) really want to stop working my current day job and pursue a part-time business during (partial) FI. However, we also would like to take a 9 week road trip in 2018 before Miss CF will have to go to school. And we “need” to replace the current kitchen (it’s about 25-30 years old and it is at its end-of-operational-life phase).

The business will not be expensive to commence, but will take time to develop. An early start is very useful here to kick-start this side project. The road trip in 2017 will be done somewhat frugal, but will still cost a fair bit of money. The renovation job I’m actually looking forward to. It will be a combination of me and a contractor attacking this one. But despite my involvement, it still will cost a large sum of money, as we will also enlarge the kitchen by re-routing the staircase and demolishing an old bathroom. The latter is already replaced by a new one, but the old one is now taking up precious (future kitchen) space.

In short, if it were just the new business, I would probably quite once my one year contract expires in November. But due to the extra expenses coming, I hope to get a contract extension and work about 4 more months to offset some of these anticipated expenses. In short, it’s probably good that we considered this about 15-18 months in advance and have some options to play with.

If you wonder what Mrs. CF will be doing, she will likely continue her career that the current company (but you never know!). Her exit strategy will be next.

Life exit strategy, image source

What could you consider?

Some of the things you may want to consider:

  • When you are FI, how solid are your finances? Can you survive a few years in a downward market (e.g. you FI start date is at the worst possible time)? Do you have a back-up plan (e.g. go back to work)? If not, perhaps you need to continue a bit longer, or find something part-time.
  • If you are not FI, how long are you planning to not work (e.g. take a sabbatical)? Or, do you want to already have a new job before you hand in your notice? Or do you want to go part-time?
  • When you are considering a career switch, do you need education? Can you potentially get some at your current employer? Or do you need education to commence the new career?
  • In case you are going to start your own business. Do you have sufficient knowledge? Can you perhaps do an internship or other training to give your new business a flying start and also make sure it is successful. Can other bloggers/entrepreneurs help you? It could be a smart thing to reach out.

In some cases you will find it is better to extent your career a bit to get some extra fun money, or renovation funds, or an emergency fund. Perhaps it also provides you with startup money for a hobby project or new business. On the other hand, if you really do not like your job and it makes your miserable, you could get out early, knowing that you have to get some temporary work to fill the financial gap. Potentially making a part time FI situation for yourself. The options are endless, but you need an exit strategy to make the most sensible decision!

The moral of today’s story is: always have a backup plan. Consider your exit strategy!

Do you have exit strategies? If so, let us know what they are and why you have them. What where your considerations?

 

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13 comments

  1. Hey CF. Nice question! We are only just entering, so we don’t really have much of an exit plan. We do have an idea about when and how we’ll leave our jobs, when we might sell our investments. However, we are aiming to own a lot of ours shares for over a decade so we’re okay in this regard.

    Tristan

    1. As long as you are aware of the fact that you ultimately will need some sort of an exit strategy (for work, financially, housing, whatever!), you are in a good position. Give it some thought, it never hurts to look ahead and position yourself with flexibility in mind.

  2. Some of great things about NL and FI in this regard. No capital gains tax on property… I repeat, NO capital gains tax on property sale proceeds. Incredible. All-in-all a low tax rate on wealth, up to a certain level. And the local contractor market (ZZP:ers) means you can use that possibility to transition from full-time employment, to partial FI via ZZP, assuming you can find contracts that don’t require you to work 40 hours. Or if they do you don’t need to work for 12 months.

    Is Mr. CF working ZZP?

  3. In terms of an exit strategy for dividend growth stocks – my criteria is easy and simple… any time the dividend is cut or reduced, i sell immediately. No since investing in a company that growths their dividend only to not have them grow it.

  4. I had a nice exit strategy but my color blindness screwed that one up. Trying to find a solution for it so success or not, that will be an interesting future post!
    For the portfolio it is easier: either go completely in dividend paying stock or generate a cashflow with option writing.

  5. interesting read…! exit strategy is not yet on my mind.

    I somehow hope that with index funds I never need an exit strategy. I do consider one day switching to DGI to avoid selling assets.worries for later.

    I do have an exit strategy for my option positions.

    1. I definitely recommend thinking about exit strategies. They don’t have to be in great detail, but a general idea of what you could do is never a bad thing. If life changes, it’s good to know your options 🙂
      Talking about options, good to read that for those you have considered exit strategies.

  6. I do not have a real financial exit strategy besides % bonds in my portfolio matches my age.
    When I reach FI in a couple of years, I rather adapt my daily activities when I am bored or fed up than plan for activities upfront. Or is this an exit plan as well ;-)?

    1. Yup, that is kind of an exit plan! Being flexible that is.
      Curious to know if you already thought about you career exit strategy in combination with your finances and tiny home aspirations!

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