A presentation by McGaunn & Schwadron CPA to educate veterinarians on how to best plan for their financial retirement by understanding different retirement plans, how they work, which 401K might be best for them, and generally being prepared for the future of your veterinary practice.
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A Veterinarian's Guide To Financial Planning for Retirement, Part I
1. Are You Ready $$ For Retirement?
Mark J. McGaunn, CPA/PFS, CFP®
President
MJM Financial Advisors, LLC
114 Turnpike Road, Suite 107
Westborough, MA 01581-2861
phone: (978) 405-3133
e-fax: (978) 776-2609
e-mail: mark@mjmfa.com
web: www.mjmfa.com
2.
3.
4. Retirement Agenda
• History & Studies
• General Strategies
• Don’t Fail
• Fiduciary Duties
• Types of Plans
• Examples of Financial Success
• Spending it
5. Retirement Over Time
Agricultural Phase
Work right through old age (60) supported by
earnings, savings, family & charity
Industrial Phase
Retirement encouraged at old age (65) by Social Sec.
as mind had lost all “mental elasticity”, gov’t. & private
pensions dominate so ability to travel and play golf.
Knowledge/Service Economy
Traditional retirement ages become obsolete
Look at Joe Paterno, Warren Buffett, or Julia Child
But how do we/employer fund a long, fruitful life?
6. Fidelity Study
500 married pre-retiree married couples ages 43 to
70 (all married >24 yrs, income>$75k, with
investments>$100k, >9 years to retirement)
1. 30% gave completely different retirement age,
expected lifestyle, intention to work during retirement
2. 58% failed to agree on advisor on spouse death
3. 33% husbands underestimate spouse retirement age
4. Only 23% worked jointly on finances, cited key
to being more prepared for retirement
8. More Gallup Data
• Avg. age at current retirees stopped work is 60
• Nearly 70% of current retirees retired before 65
• Only 27% retired over age 65
• Most pre-retirees expect to retire at 64
• But 57% of non-retirees say 65 or older, possible
due to increasing “full benefits” age for Social
Security (66 or so and rising)
9. Putnam Investments Survey
Of working Americans aged 45 and older:
• 20% support parents
• 26% of above workers supporting parents say
they must delay their own retirement
• 45% support adult children with > $2,500 /yr
• 25% provide housing for adult children
• 17% received inheritances (avg. only $38k)
10. McKinsey Retirement Study
Of 3,000 retirees and pre-retirees studied, 40%
of retirees stated they were forced to stop
working:
• 47% cited health problems
• 44% lost their jobs
• 9% cited family care-giving responsibilities
11. Preparedness
• Examined our medical clients (veterinarians,
dentists, ER physicians, psychologists,
anesthesiologists, podiatrists, surgeons,
optometrists, CRNA, and NP).
• Commonalities-which healthcare clients group
best prepared for retirement?
• Traditional notion-reduction in working hours
with investment assets providing primary income
source rather than salary, LLC or S Corp
distributions.
12. Rules of Thumb
I dislike rules of thumb as they change with
whomever you speak with. Common ones:
• Life insurance $ = 5 to 9 times your annual salary
• Retirement spending = 70% of pre-retirement $
• Safe portfolio withdrawal rate = 4% (1998 Trinity
study) has 100% success prob. (1926-1995)
• Only need LTC Ins. if net worth < $3-5 million
• 100 (now 110) – Age = % stock allocation
• 60/40 or 40/60 ? (my dad’s ROT)
13. Hence, “The Bucket Theory”
Veterinary
Practice(s)
Value
401(k)
SEP IRA
Trad. IRA
ROTH
DB
Taxable
Savings
(Trusts)
Practice
Facility
& Other
Real
Estate
Annuity &
Insurance
Plans
14. Retirement Success Inclusion
• Higher-than-average net worth.
• Constantly worked on assuring a comfortable
retirement standard of living.
• Significantly more conscious of increasing net
worth.
• Diversified wealth into each “Bucket”.
• Disciplined savers and investors.
• Managed risk to protect their wealth.
• Had a formal, written financial plan.
15. Reasons why DVM’s/MD’s fail:
1. Start retirement programs too late.
2. A majority live beyond their means.
3. Being debt free admirable mantra-
not best use of money.
4. Practice outgrown original pension plan.
5. Fall prey to product sale vs. fiduciary advice.
6. Believed no real need to save outside
practice.
7. Didn’t understand why to fund all “buckets”.
16. General Success Rule
Formulated a vision of what retirement security
was early in their pre-retirement years.
According to medical owner economic studies,
doctors who have planned for retirement since
they began their careers have accumulated 5
times more than what a non-planner has saved.
17. Why Should Your Plan Be Different?
Yale researchers wanted to study people’s
motivations and the role that goals play. Asked
Yale Class of ‘53 before graduation 4 questions:
1. Are goals important? 100% said yes
2. Do you have goals? 100% said yes
3. Are your goals written down? _____?______
4. Do you have a plan to accomplish
those goals? _____?______
Only 3% answered yes to #3 and #4 !!
18. Fast Forward to Year 1973
Same researchers assembled Yale Class of ’53
& asked each what their net worth was.
• The 3% that had (a) written plans and (b) had
implemented those plans had a combined net
worth greater than the remaining 97% combined!!
• Those who had written goals had accomplished
50% more of those goals than those that did not.
19. Global Retirement Portfolio
Focus of Asset Allocation
Plan is based on your
long-term objectives.
“Long-term” means over
5 years or more.
Reasonable amount of
investment risk in
expectation of higher
returns.
Includes CD’s, taxable
brokerage accounts,
mutual funds, ETFs,
IRAs, ROTHs, 401(k)
accounts, real estate.
20. Your ERISA Fiduciary Status
Subject to conduct standards because you act
on behalf of retirement plan participants and
their beneficiaries. Behaviors include:
• Acting solely in the interest of plan participants
and their beneficiaries and with the exclusive
purpose of providing benefits to them
• Carrying out their duties prudently
• Following the plan documents
• Diversifying plan investments, and
• Paying only reasonable plan expenses.
21. Mandatory Fiduciary Tool
An Investment Policy Statement (IPS) is your
basic and best defense against any future
accusations of poor decision making.
A good IPS:
1. clarifies the purpose of the plan,
2. how decisions are made,
3. who makes those decisions, and
4. it sets forth the criteria to be used in the
investment selection and monitoring
process
22. Good IPS Fund Selection Criteria
• Risk-adjusted Performance over 1, 3, 5, & 10 years
• Performance vs. Peer Group over 1, 3, 5, and 10 years
• Expense Ratios
• Turnover Ratios
• Manager Tenure
• Fund Size
• Top 25 Holdings and Portfolio Composition
• Style Consistency
23. Monitoring Process
• Fiduciary law expects you to review investments
on a regular basis.
• Generally means tracking investment
performance against well-defined monitoring
criteria at least annually.
• By meeting periodically to discuss investments
and keeping detailed notes, you demonstrate
sufficient commitment to a procedural due
diligence process.
24. Retirement Plan Future
• Physicians and dentists have poor history in
offering retirement plans due to impact on their
own levels of mandatory contribution to
employee accounts.
• SEP and SIMPLE (Savings Incentive Match Plan
for Employees of Small Employers Plans) IRA
Plans have seen limited utilization in multi-
employee practices.
• 401(k) plans now have much more reasonable
fees, on-line control, and greater flexibility
25. New or Improved?
Traditional Plan
Employers must contribute same flat % of profits
to employees.
Sophisticated Plan
Practice owners and/or key employees can
contribute greater %’s to own 401(k) profit
sharing accounts.
26. 401(k) Plan Limitations
• In 2010 the total of both employee and employer
contributions is limited to the lesser of 100% of
your compensation or $49,000 ($54.5k over 50)
• 2010 Employee Contribution Limit is $16,500
• 2010 Catch-Up Contribution Limit if over age 50
is $5,500
• Employer could contribute match $32,500
27. Type of 401(k) Plans
1. 401(k) Profit Sharing Plan
2. 401(k) Safe Harbor Plan (no anti-discrimination
testing)
3. 401(k) Profit-Sharing with Permitted Disparity
4. 401(k) profit-sharing with New Comparability
28. “Safe Harbor” 401(k) Plan
• Allows a matching amount for owner.
• But, immediate vesting for all employees.
• Required employer contribution to all employees
is either:
– matching contribution of 100% of deferral up
to 3% of pay + 50% of deferrals next 2% of
pay, or
– non-matching contribution of 3% of pay for
all eligible ‘ees regardless of deferrals.
29. “Permitted Disparity” 401(k) Plan
• Allows plan “integration” with Social Security.
• Proportionately less benefits paid to employees
earning under FICA cap ($106,800 in 2010).
• Generally, this type of allocation formula tends to
favor higher paid employees or practice owners.
31. “New Comparability” 401(k) Plan
• IRS regulations permit companies to over-
weight benefits to older practice owners and
other highly compensated employees.
• Uses “cross-testing” to satisfy the discrimination
rules.
• Cross-testing converts contributions made
today into equivalent benefit accrual rates and
allow owners increased flexibility in their
contributions.
32. “New Comparability” 401(k) Plan
• Employees are divided into groups.
• Each group contribution is a different % of
compensation.
• Simplest structure-(1) owner group and (2) other
employee group.
• Some practices have several groups (owners
over/under age 40, practice managers, tech
staff, receptionists, etc.)
33. “New Comparability” 401(k) Plan
Ideal for practice owners who:
1. Are older and earn more than most of their
employees
2. Want largest possible share of plan
contributions allocated to own accounts, and
3. Desire contribution flexibility of profit sharing
plan.
35. Defined Benefit Plans (DB)
• 401(k), SIMPLE, IRA, SEP are defined
contribution plans-monitor what you put in to get
unknown future benefit
• Defined benefit programs find the actuarial
investment required to end the plan with enough
assets to fund a pre-defined annual benefit.
• Expensive to maintain
• Great for high earning owners who are much
older than rest of staff.
• Annual contribution as high $150,000
36. Underlying Risks Abound…
• Inflation can erode purchasing power.
• Overly aggressive or conservative portfolio
allocations should be modified to a family’s
global risk tolerance.
• Making up for lost time can lead to disaster.
• Rising health care premiums may significantly
erode retirement savings.
• Longevity risk (living >= 20 to 30 years)
means retirement funds may be depleted
earlier.
37. Three Scenarios!
Not
formulating
a formal
retirement
savings plan
=Bad End
Result
Saving the max
custom 401(k)
$ provides
excellent
complement to
practice value
=Demonstrably
better
Saving the ‘ee
regular 401(k)
limit provides
good complement
to practice value
OK, …
=Could be
better
A. B. C.
38. 50 year-old practice owner
Makes a $16,500 annual 401(k) contribution for 12 years until
retirement Still has potentially $463,000 at age 62 (moderate
portfolio allocation).
B
39. Same 50 year-old practice owner
Contributes max. $16,500 annual 401(k) contribution
for 12 years with $5,500 catch-up contribution plus a
corporate match of up to $32,500.
Potential $1.13 million (moderate portfolio allocation).
C
40.
41. How to get it out?
J. Guyton in Journal of Financial Planning suggest
higher maximum initial withdrawal rates may be
achieved:
1. withdrawal rate 5.2-5.6% at high C.I. if 65% equities
2. withdrawal rate <5.2% at high C.I. if 80% equities
(greater purchasing power at lower success)
3. withdrawal rate 4.6% at high C.I. if 50% equities
Complex rules must be followed to achieve-
related to following year rebalancing processes.
42. Minimum Required Distributions
• Required distribution from retirement plans by
April 15th in the year after reaching 70 ½
• First Year Divisor is 26.4
• ROTH IRA’s not subject to MRD rule (they can
potentially last many generations)
• Has to figure into your retirement tax planning
• $1 million 401(k) plan balance so $37,879 MRD
• After tax, that’s not much…
43. So, Practice Owners Need To:
• Plan, Plan, Plan
• Save, Save, Save
• Focus on how much is saved, not earned.
• Employ best pension plan for vet practice.
• Fund pension plans at maximum level for age.
• Maintain some version of a 401(k) profit-sharing
plan that best fits vet practice and staff census.
• Defined benefit plans are available, but…
45. Contact Information
Mark J. McGaunn, CPA/PFS, CFP®
Managing Member
McGaunn & Schwadron, CPA’s, LLC
75 2nd, Avenue, Suite 425
Needham Heights, MA 02494-2897
main (781) 489-6651
direct (781) 348-9227
e-fax (781) 479-5985
e-mail mark@mcgaunnschwadron.com
web: www.mcgaunnschwadron.com.com
