Rick Willeford, MBA, CPA, CFP
More than half of the doctors I advise either have given up on retirement plans altogether, or they have the wrong kind of retirement plan. That means a lot of folks are paying more taxes than they have to, or the cost of funding their plans is too high — or both!
No retirement plan
Three reasons account for why most doctors do not have a retirement plan: 1) They think the staff costs are too high; 2) They think they can't afford to fund a plan; and 3) They have maxed out an old plan.
The typical rule of thumb about staff costs is that at least 65 percent of the total contribution to a retirement fund should go to your own plan. On the surface it may appear that if your income puts you in the 35 percent tax bracket, then it's a toss up whether to give your staff or the IRS the other 35 percent. However, this is an oversimplification that focuses only on the current tax deduction and ignores the tax deferral for many years on investment growth. Believe it or not, if you have 20 years or so to save, you can actually break even by funding a plan even if your share is as low as 50 percent of the total contribution.
For those of you who think you simply do not have the cash flow to fund a plan, you are playing with a ticking time bomb. As you make decisions about buying your home, cars, furniture, etc., you should also budget at least 5 percent (preferably 10 percent) of your gross income for savings. If that 5 to 10 percent means spending less on a home, etc., then so be it.
One of the "joys" of being self-employed and in charge of your financial destiny is that it is up to you to provide for your retirement. I know 60-year-old doctors who never got around to "getting around to it later." Remember, "Hope is not a plan." To give you an idea of the magnitude of the retirement issue, burn the following figures into your mind. As a general rule, for every $1,000 per month that you need for a 30-year retirement period, you will need the following investment assets (depending on when you retire): If you retire now, you need about 1/4 million dollars. Due to inflation, if you retire in 10 years, you will need 1/3 million. If you retire in 20 years, you need 1/2 million. If you retire in 20 years, and you want the equivalent of $10,000 per month current purchasing power, you need 10 x $500,000 = $5 million! The good news is that you have 20 years to get there.
Wrong retirement plan
Many people either don't realize that they have outgrown their original "starter" plans, or they have fallen prey to a "financial advisor" who was more interested in selling something - anything - than taking the time to customize a plan for their specific situation.
A SEP or SIMPLE plan is a great starter plan. The staff costs can be very low. An SEP allows you to contribute a lot for yourself, but the staff cost is extremely high after about three years. The SIMPLE plan enjoys low costs, and the low limits on your contributions (maximum of about $13,000) may be all you can afford for awhile anyway. You can often increase your contributions by employing your spouse.
However, once you are ready to save some serious money (up to $41,000 in 2004), then you need to look at true "qualified" 401k/profit sharing plans. The horsepower and sophistication of these plans result in more administrative and design costs, but savings with the proper plan pay for these costs many times over. While an "off the shelf," plain vanilla 401k/profit sharing plan allows you to make larger contributions, you often pay the price of much larger staff costs. Be sure that your retirement plan advisors take a look at the newer age-based, cross-tested plans, examine restructuring to pass testing, and look at combination DB/DC plans to control employee costs. These plans might let 85 to 90 percent of the total contribution go to you. I like that better than the 50 percent break even figure above!
Raymond "Rick" Willeford, MBA, CPA, CFP, is president of Willeford & Associates, CPA, PC, and Willeford CPA Wealth Advisors, LLC. As a fee-only advisor, he has specialized in providing financial, tax, and transition strategies for dentists since 1975. Mr. Willeford is the president of the Academy of Dental CPAs, an associate member of AADPA, and a member of Linda Miles' Speaker and Consultants Network. Contact him by phone at (770) 552-8500 or by email at [email protected].
