When you’re in the
midst of practicing, the last thing you want to think about is when it’s
all over. Much like death, retirement is something best left for the future—preferably
the far future.
Yet, if a comfortable and active retirement is your goal, the sooner you begin
thinking, planning and acting upon it, the better it will be. When the process
is over the easier you’ll be able to sleep at night—both now and
in those golden years.
While even the best crystal ball tends to be a little hazy, the practicing doctor
of chiropractic today is faced with a much longer and hopefully more active
life than his or her parents or grandparents. Most doctors are members of the
baby boom generation that can expect to live several decades after 65 in good
health. Statistics indicated that the average person 65 years of age today can
expect to live to 85. Many will live much longer.
Setting Goals
Unlike the corporate executive whose company usually provides a retirement plan,
the DC is usually self-employed, often as a sole proprietor. That means whether
you craft a good plan and put away enough money—or even any at all—is
entirely up to you.
Yet, a small business doesn’t have to mean a small retirement. Doctors
have many choices of plans that allow for putting away as much or as little
as they need while sheltering the money from taxes. All the building blocks
are there but you must put them together into a plan that works for you.
While retirement is about dollars and cents, it’s also about goals and
aspirations. What do you want to do with your life during retirement? Those
who only think about surviving or just having enough money to buy the groceries
aren’t likely to be very satisfied or very happy in this period.
“It’s about their goals, about what they want to accumulate, how
they want to accumulate it,” says Arthur Miller, founder and president
of Asset Protection Associates and a nationally recognized expert in qualified
plan distributions “Are they providing an estate to spouse, children,
family members, and are they charity minded? There are many, many issues. We
have to know how they feel about everything before we can make any recommendations.
They have to be based on what’s important to them.”
Retirement Calculator
While many in retirement live on a so-called fixed income, the reality is that
expenses often aren’t constant. Whether it’s that long-planned trip
to Australia or the purchase of a second home in Costa Rica, you may have unique
or one-time expenses in the early retirement years that you don’t expect
to have later on. On the other hand, with advancing age come higher health care
costs.
“You’re taking a look at the income level you need in retirement
and how can you maximize the probability that you’ll have that,”
explains Dr. Don Taylor, Associate Professor of Finance at The American College
in Bryn Mawr, Pa. and a columnist for Bankrate.com.
He recommends running a retirement simulation model that shows how much money
will be required to fund various payouts at retirement based upon different
assumptions about contributions and investment growth. Most financial planners
have the software needed to run these models or you can do it yourself using
the free “retirement calculators” found at financial websites such
as Bloomberg.com or mutual funds such as T. Rowe Price.
While these simple devices can get you started, they’re no substitute
for professional advice. Financial author Tom Taulli, who has written on retirement
issues for Forbes.com and TheMotleyFool.com, says to look first to a financial
planner, broker, CPA or attorney and avoid the temptation to try to do it yourself.
“You’ll never bring the level of expertise to it no matter how smart
you are,” he says. “Small businesses in particular need all their
attention focused on their core business.”
Put Yourself First
Once you’ve decided what you need for retirement and how much you need
to sock away, many doctors are also faced with another tough choice—do
they set a plan for themselves or should they try to include their employees?
That can be a tricky question to answer.
“Once the plan has been put in place it’s hard to reverse yourself
to get yourself out from such a commitment to the staff,” says David Roberts,
a financial consultant with MD Planning. “The doctor may not have considered
what his own cash flows are like and then when he sees what it really looks
like to be funding the staff [retirement plan] they start to choke.”
Providing a retirement plan for workers can sometimes serve as a retention incentive,
but in many cases it may simply be unappreciated, even as the doctor struggles
to make the mandated contributions. In addition, plans may create substantial
liability for the employer who fails to manage and fund the plan according to
IRS regulations.
The Right Plan
With retirement—as with few other decisions in life—the choices
and actions you take today will reverberate down through the years affecting
your life in the future. The investment vehicle you choose is particularly important
because it determines how much cash you’re able to shelter for the coming
years.
Some tax sheltered accounts such as a Traditional or Roth IRAs may only allow
you to put away $4,000 a year—not nearly enough if you’re starting
late or will be heavily counting on the money.
An attractive plan for the self-employed is the SEP-IRA (Simplified Employee
Pension) which is easy to set up and cheap to administer. Only the employer
can make contributions to the SEP for himself or on behalf of employees. The
contribution limit is 25 percent of compensation.
In addition, there are other vehicles for putting significantly more away, according
to John Maertz, a retirement specialist with Robert W. Baird & Co. in Chicago.
For the sole proprietor one of the best vehicles to come along is the Solo 401(k)
which gives the individual the ability to put away substantial sums of tax sheltered
money. For 2006 those sums are $44,000 with those over age 50 able to do a catch
up amount of up to $49,000.
“It’s a combination of the 401K salary deferral and a profit sharing
contribution,” explains Maertz.
Within this plan you can sock away 25 percent or $44,000—whichever is
less. You can also contribute 100 percent of compensation up to $15,000 on top
of the 25 percent to reach the $44,000 cap.
“With the Solo 401(k) you don’t have any of the testing requirements
that you would have with the 401(k) where you have multiple employees involved,”
he adds. “The costs are minimal and its now pretty competitive among the
various providers that offer these plans.”
In fact, most of the work can be done on the Internet as with many other retirement
plans.
A more complicated and expensive, but potentially more lucrative plan for the
doctor with high income, is a new form of defined benefit plan.
“It is more of the traditional pension type of plan that is based upon
a defined benefit at retirement,” explains Maertz. “It gives a person
the ability to put potentially even significantly higher amounts away on a year
to year basis.”
Because the plan requires the work of an actuary, it is significantly more expensive
than IRAs or Solo 401Ks. The costs range from $1,200 to $1,500 per year at the
low end. Yet, a defined benefit plan such as the 412(i), which uses insurance
to fund the plan, enables the doctor to set aside as much as $240,000 into the
retirement account in order to fund the final benefit while securing a substantial
deduction for the business.
Saving Discipline
Once you’ve settled on the goals and the means for getting there the rest
is simple, if not easy. You have to stick to your plan, keep putting money away
and resist the temptation to go for the home run. While conservatively managed
mutual funds certainly won’t get anyone’s blood boiling, most financial
experts advise that you avoid making frequent impulsive investments in hopes
of finding the next e-Bay.
That doesn’t mean that you can’t have some fun. According to Dr.
Don Taylor, “If you want the feel of having some control then by all means
put no more than 5 to 10 percent of investment assets into an account that you
can control. Maybe your trades will add to your retirement portfolio and fund
that extra trip to Hawaii. If not, you’re still living comfortably—and
that is what retirement is all about.”