At some point in the lifespan of your veterinary practice, you may have started to wonder if you make enough, saved enough or just have enough. “Enough” could mean the freedom to retire from your veterinary practice and no longer work, the ability to pay for the things you want or the amount necessary to provide a comfortable lifestyle for your family.
There is no one-size-fits-all plan to generate “enough” for everyone, as that depends on your individual savings goals and spending habits. However, we can outline a financial planning framework that yields an attractive income stream to help you reach your goals.
It all starts with securing and building a strong financial foundation.
Between student loans, the cost of purchasing a practice and the additional costs of the building and improvements, a veterinarian will quickly accumulate debt in the early years of a practice.
Year by year, you will build wealth by paying down that debt while growing the equity in your practice and your retirement plan. These two steps should be taken concurrently, rather than waiting until all of the debt is paid off before beginning to save for retirement. Talk to your financial advisor to determine what the right balance is for you.
Build wealth year by year over the life of your practice.
As your practice matures, begin to diversify your assets by investing more and more into a tax-qualified retirement plan.
In 2015, a 50-year-old veterinarian with the right 401(k) Profit Sharing Plan can set aside $59,000 for retirement. If married to a 50-year-old, another $24,000 can be set aside. If the veterinarian pays a combined federal and state marginal tax rate of 40%, the after-tax cost of these savings amounts to $49,800. By adding a cash balance plan to the practice and operating it in combination with a 401(k) Profit Sharing Plan, the veterinarian will be able to increase contributions up to $314,000 at a reasonable cost for the staff.
As your practice matures and your debt load eases, consider maximizing your retirement savings by funding a Roth IRA and developing an after-tax investment strategy. This will allow you the flexibility to control your tax bill in retirement by structuring distributions from your different “buckets” of funds.
Your practice is the financial vehicle that will carry you through life.
As you near retirement, there should be a substantial amount of equity built up in your practice. Recent sales show three sources of value that will contribute to the amount saved for your retirement:
- Building and improvements ($800,000 – $1,500,000)
- Goodwill, which accounts for your practice’s reputation and associated revenue stream from established patients ($500,000 – $800,000)
- Equipment and Accounts Receivable ($75,000 – $150,000)
Just like it takes regular fill-ups, repairs and maintenance to keep your vehicle on the road, it also takes up-to-date technology and equipment to keep your practice operating at maximum efficiency. Growing your practice efficiently will allow it to become the financial vehicle that takes you down the path towards building true wealth.
So – do you have “enough” for retirement?
When planning for retirement, consider all your resources and your own individual spending habits to determine what “enough” looks like for you.
A back-of-the-napkin approach would show that if you had after-tax proceeds on the sale of your practice of $575,000 and your building of $800,000 as well as $1.5 million in retirement funds and $150,000 in after-tax savings, then you would have $3,025,000 of available assets for retirement, excluding your home. Applying a “prudent withdrawal” strategy of 4% per year of retirement assets would result in yearly withdrawals of $121,000 plus your Social Security benefits.
A financial planning tool called a “Monte Carlo analysis” can discern your optimal retirement distribution amounts based upon your assets, spending patterns, life expectancy, earnings and tax rates. You should have an analysis prepared several times prior to retirement as well as after the sale of the practice to set guideposts on current spending so that you’ll have “enough” as you age.