The most common and familiar approach that practice owners follow to produce income for retirement is sell the practice, invest the sale proceeds then live on the interest and dividends for income, and lease the real estate to the new owner. Depending on the timing of the sale can mean success or failure for most because the sale proceeds might not be enough to generate income at the same level before selling.
Imagine, your income today will be entirely dependent on how the stock market performs each month. If the market is down, you owe money. If the market is up, you receive income. This is how most people enter retirement and stress about the possibility of running out of money or needing to reduce their income. There is the belief that “I won’t need as much income in retirement” because the mortgage is paid and other expenses are reduced. But, retirement is not that simple. Think about how your time is used on a weekend or when you’re not working. When you’re working, spending money on random things is low because you are busy handling other priorities and just trying to survive. During the weekend you might want to experience things, spend time with others, and buy things outside of the norm of food, electric, and utilities. This is exactly how retirement works. Every day can be a weekend.
Look at your current plan, how much of it relies on the sale of your practice? You might receive a paycheck through a W2 and the rest accumulates in the practice or you take random distributions throughout the year. Sometimes knowing what to do is difficult because when we are in survival mode we put up blinders and when we’re ready to sell the practice all the planning that could have been done prior might not be an option any longer. At this point there is no way to capture any more profits that the practice generated.
The best way to focus your energy is to build a systematic approach to where your veterinary practice is used to build personal wealth. This can be a combination of salary and active distributions from the practice. When we work with clients there is an account setup specifically for capturing income and then redistributed towards lifestyle and wealth building. We call this account the Wealth Coordination Account (WCA). By setting up monthly distributions from the practice and depositing all your W2 income into the WCA we can truly see what is available for wealth building and what can be consumed back in lifestyle. Each quarter after your tax estimates, there is a predetermined target set on the practice accounts to let us know what “dead cash” is available. This is any money not being used to increase profits of the practice and beyond the operational fund for salaries and other daily practice expenses. The ultimate goal is to reach at least twenty percent of your income and profits in savings that can be used for wealth building.
A final thought, the more we can focus on using the practice to build personal wealth (not let the practice be your wealth) allows for you to diversify from your practice and contribute money towards practice supporting assets to counterbalance risk. A practice today generating $1.5 million in revenues and $250k in profits after expenses has tremendous potential. During the next 20 years, the practice might be worth more than $2.5 million dollars based on four percent growth of profits and while the practice is growing there were over $7 million in profits that could be reinvested or used to create personal wealth to offset the reliance on the future sale for retirement income.
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