Planning for Retirement
Whether you are launching your professional career, navigating mid-life opportunities and challenges, or planning for your “golden years,” it’s worth considering whether your practice will produce sufficient wealth to cover your current needs while paving the way toward retirement. We can’t create a one-size-fits-all plan to generate enough income for everyone as there are varying definitions of enough. But we can outline a financial planning framework that gives the possibility of yielding an attractive income stream.
In the early years of a practice, architects and engineers (A&E) should manage their spending to allow for timely (or even accelerated) payment of student loan debt. According to student loan expert Mark Kantrowitz, the average graduate of the Class of 2016 leaves college with $37,173 of debt. With additional costs for pricey textbooks, models, project submissions, technology, and professional credentials, A&E grads tend to carry larger loan balances. Although 1 in 10 graduates are delinquent on their student loan payments, this indebtedness cannot be discharged in bankruptcy proceedings. Moreover, you don’t want your employer to be forced to garnish your wages to render payment. [How can you be trusted to run a large project if you can’t manage your own finances?] Fortunately, your compensation should prove sufficient to cover your obligations. According to the Bureau of Labor Statistics, the median income for an architect is $76,100 and $82,200 for a civil engineer.
For those starting a family, the home mortgage becomes a new source of debt. It’s a good idea to purchase a home that enables the family to live comfortably without draining the household of precious financial resources. Obviously, this decision is highly personal based on one’s values, needs, and activities. It’s easy to get carried away by enthusiasm during the sales process, but a healthy dose of financial reality ensures you make a decision that feels good over time.
As soon as practical, contributions to a tax-qualified retirement plan are encouraged, especially if your employee benefits include an employer match. A $5,000 annual contribution earning 8 percent per year yields $1.3 million in 40 years. That same investment strategy on a 20-year time horizon produces $566,416. [Compound interest can be your best friend!] A traditional IRA may reduce your current tax obligations while helping you finance retirement. Roth IRAs are not eligible for tax deductions; however, these assets will not be taxed as they generate earnings or otherwise increase in value. Your tax advisor can help select an investment vehicle suitable for your circumstances.
As you inch toward middle age and enjoy partner status within your firm, a profit sharing plan could provide an attractive means to shelter income while saving for retirement. In 2016, a 50-year-old partner with the right 401(k) profit sharing plan can set aside $59,000 for retirement. If your spouse is 50+ years old, another $24,000 can be placed into a 401(k) or Simple IRA. If paying a combined federal and state marginal tax rate of 40 percent, the after-tax cost of these savings amounts to $49,800. While the eventual withdrawals from these accounts will have tax implications, you may be in a lower tax bracket when they’re realized.
Retirement accounts are not the only form of recommended savings. As the practice matures and the debt load eases, you should develop an after-tax investment strategy funded by resources that are not required to meet current obligations.
When nearing retirement, you may have equity built up in your practice. The key to transforming this potential into reality is advanced planning. It takes time and energy to maximize business valuation, find a suitable buyer, consider the impact on employees and clients, and the firm’s capacity to garner business.
If you followed a prudent withdrawal strategy of 4 percent per year of retirement assets, it would take $2.5 million to produce $100,000 in income. Social security income could either augment this income stream or reduce the requisite assets. At retirement, your asset pool might consist of:
- Retirement Plans: $1.3 to 1.8 million
- After-Tax Savings: $50,000 to $300,000
- Personal Residence: $300,000 to $800,000
So – do you have “enough” for retirement? A financial planning tool called a “Monte Carlo simulation” can discern your optimal retirement distribution amounts based upon your assets, spending patterns, life expectancy, earnings, and tax rates. It is highly recommended that you have an analysis prepared several times prior to retirement. It sets guideposts on current spending so you’ll have enough as you age.