Are You Ready $$ For Retirement?

Mark J. McGaunn, CPA/PFS, CFP®President

MJM Financial Advisors, LLC114 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

Retirement Agenda

• History & Studies

• General Strategies

• Don’t Fail

• Fiduciary Duties

• Types of Plans

• Examples of Financial Success

• Spending it

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?

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

Trust Gallup…

So, 51% more

need to work

part-time

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)

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)

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

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.

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)

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

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.

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”.

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 5times more than what a non-planner has saved.

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 !!

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.

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.

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.

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

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

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.

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

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.

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

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

“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.

“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.

401(k) Plan w/ “Permitted Disparity”

“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.

“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.)

“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.

Three Great, Low-Cost 401(k) Plans

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

Underlying Risks Abound…

• Inflation can erode purchasing power.

• Overly aggressive or conservative portfolio allocations should be modified to a family’sglobal 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.

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.

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

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

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.

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…

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…

Thank You!

谢谢

Merci

Danke Schon

Grazie

ありがとう

당신을감사하십시오

Obrigado

Gracias

Contact Information

Mark J. McGaunn, CPA/PFS, CFP®

Managing Member

McGaunn & Schwadron, CPA’s, LLC75 2nd, Avenue, Suite 425

Needham Heights, MA 02494-2897

main (781) 489-6651direct (781) 348-9227

e-fax (781) 479-5985e-mail mark@mcgaunnschwadron.com

web: www.mcgaunnschwadron.com.com