Why the Traditional Retirement Plan is Not For Practice Owners - ECONOLOGICS FINANCIAL ADVISORS

In any area of life or business, you will find certain advice or circumstances which may be a fit for some people, but not for others. The trouble is that one size does not always fit all. As a practice owner, you have unique opportunities and challenges. Therefore, it only makes sense that you require specialized advice.

I see this in my industry when it comes to “retirement planning” for business owners.

The typical “retirement planning model” (for the masses) is based on how much money you can ACCUMULATE over a period of time in savings accounts such as bank accounts, 401(k)s, IRAs, brokerage accounts (including investing in mutual funds, stocks, bonds and other securities). The formula for “how much” you need is typically based upon an amount of income you would need to replace when you are no longer working at a J.O.B.  This “retirement planning model” is the generally-accepted practice amongst the financial advisor community and is distributed to the general population (which includes business owners, as if you are the same as everyone else).

Here’s an example of what the math typically looks like: Let’s say you make $200,000 a year. The first step is to determine what percentage of that income you would need once you are “retired” from earning an income. Then you calculate how much you would need to “save” in order to create that income from your savings. Next, you need to determine how to invest that money so you will earn enough return (without taking too much risk) so that, theoretically, you don’t run out of money before you die. Most advisors and financial publications will tell you that you should be able to “safely withdraw” around 4-5% of your portfolio in retirement income.

Again, this retirement planning model is based upon the accumulation of assets that will be distributed to you over a period time. Realistically there is a low statistical probability that you won’t run out of money. Does that sound very fun you? Do you want to have that as a primary concern? I don’t think so. Fortunately, this retirement planning model is NOT for a practice business owner.

Here are 3 reasons why:

  1. Business owners don’t have a static income. I have never met a practice owner who had the goal of making the same amount of money every single year. You are constantly looking for ways to grow and expand so you can maximize the income potential of your business. You may make 200k one year and 2 years later be making 350k. I have seen it happen more times than not where a practice owner doubles their personal income in a short period of time. The traditional “retirement” model is based upon those with a fixed income or an income that increases with the rate of inflation every year. Having a static income is not applicable to you, so it’s tough to do the traditional calculation on a constantly moving target.
  2. Business owners take tremendous risk in their business. Your business is (or should be) a wealth creation machine. For most of you it is the primary income source for your household. A business should be able to provide enough of a profit that allows you to live your lifestyle, pay your taxes, AND take a significant chunk to help create other income streams – so that you aren’t reliant on your practice income forever. But your business is a risky asset and has about 50-60 pitfalls and roadblocks that you may never see coming. Because of this, you can’t necessarily invest your money “like the masses” do. You need look at liquidity, asset protection, speculative risk, income potential, and taxes when it comes to building wealth – so that you can pounce on opportunities or salvage your business if you need to. The current “retirement model” doesn’t necessarily take all those factors into consideration.
  3. Business owner’s confidence grows over time and therefore their financial goals change. I have had the pleasure of working with over 500 private practice owners and have had over 15,000 conversations with them. I can tell you that as you progress through your journey as a business owner, your financial goals will change. While many practice owners start out thinking “that $1 to $2 million would be enough for me,” what ends up happening is as your business grows, so does your confidence. When your confidence grows, you start wanting more and more abundance. I have had practice owners start out saying “I just want to have enough to retire” and this transitions into “I want to be worth $20 million!” Because of this, you need to follow a financial planning model that aligns with the change you will see in yourself, your desire to expand your financial goals, and how you want to spend your time. A business owner is simply not hardwired to sit around and do nothing. You will always have a desire to be producing something of value or contributing in some way until you die. If you want to prolong your life, you must have a purpose.

Here is the Retirement Planning Model for a Practice Owner:

As a business owner, you should follow a financial planning process that puts the focus on INCOME rather than accumulation of savings. In other words, don’t ask the question of “How much do I need to save for retirement?” Ask the question, “How much in INCOME do I want to have in retirement?”

At Econologics Financial Advisors, here’s how we do the math:

  1. Determine your minimum monthly income needs. In our system, we call this the RMMI (Reliable Monthly Minimum Income). This is an income amount that would pay for all of your basic household financial requirements, and it comes from investments that require little or no attention from you. Don’t get caught up in the significance of “what investments do this?” Just name the amount – 5k, 10k, 15k? It doesn’t matter – the math can be done later. Right now I just want you to NAME the minimum amount of income you need.
  2. Determine your DESIRED monthly income needs. We call this the DMMI. (Desired Monthly Minimum Income). This is an income amount you want to have coming in that pays for your desired lifestyle. The income would be generated from ALL of your income producing investments. Some of those investments may be “passive” and some would require more of your attention (such as businesses, consulting, or some real estate).

The beauty of this retirement planning model is that YOU DETERMINE WHAT YOU WANT, FIRST AND FOREMOST, and then reverse engineer what you would need to do in order to produce this amount of income. 25K? 40k? 80k? It’s entirely up to you.

This INCOME-based planning approach puts you in the driver’s seat. It allows you to align your income with the lifestyle you WANT to have. It doesn’t make you reliant on 1 or 2 income sources from investment vehicles with potentially volatile performance that has too large an impact on your ability to live life on your terms.

Don’t settle for average advice when you need specialized planning.

We have worked with hundreds of private practice owners helping them improve their personal and business wealth through a Results-Based Financial Planning® system built specifically for them – including retirement planning.

EVERY practice owner needs a financial advisor who understands how important their business is to their household, stands by them when times get tough, holds them accountable, and guides them towards financial success.

We want to be your guide. It’s what we do for practice owners like you! Let us guide and advise you on your financial journey – no matter what phase of ownership you are in. Our goal is to empower you to make the best financial decisions which will lead to financial success, and we are experts in what we do.

Schedule an appointment today to learn more about how we can create a road map for you. Visit www.econologicsfinancialadvisors.com