Securing your financial future: ways to save, invest, and spend wisely
In today’s economy, it is more important than ever to save and plan for the future. And experts agree there are many steps you can take in all phases of your career — be it saving, investing, or estate planning — to help improve and secure the financial prospects for yourself and your family.
By Tammy Worth
Keith Maule was teaching at a recent seminar hosted by his chiropractic management company when one of the doctors at the event said some of the advice Maule had previously given helped save his practice.
The chiropractor’s office in Galveston, Texas, had been completely wiped out during a hurricane. It took two full months to get things up and running again, but because he had an emergency savings fund, he never had to worry about finances.
One of the first things experts recommend is to create an emergency fund with two to three months of expenses.
Maule, the president and CEO of Integrity Management, says that, should a disaster occur such as the one in Galveston, this fund will help protect your practice and your personal funds. Maule recommends putting the funds in a stable, interest-bearing savings account, such as one from ING.
Once you have this fund, you can begin an investment strategy. For a sole practitioner, a simple plan like an IRA is likely your best bet, says Leslie Kelly, CFP, president and CEO of American Financial Advisors. If you have a medium-to-large practice or multiple locations, 401(k) plans work well because they are easy to administer.
When you’re creating a 401(k) plan, Kelly says you should make sure to understand all of the fees associated with it, know where the money is held (it should be a third-party custodian like Charles Schwab or Fidelity), and how often you will be contacted regarding the account.
Before investing any money, she says it is imperative to sit down with your family and financial advisor and write an investment policy that considers: when you will need the money, your risk tolerance (what kind of decline you are willing to accept), and your tax needs.
Reap the benefits
Though she cautions that each person has a different situation, she says there are some general rules for good investing. First, a balance of about 40 percent stocks to 60 percent bonds is typically appropriate. Next, invest in both international and domestic companies. And finally, be sure to have small and large companies in your portfolio. Once you have an appropriate allocation, add to it regularly.
You should also consider who will be eligible to take part in a 401(k) and how much you should allocate to the benefit.
If a business is profitable, a doctor can create a 401(k) and match the employees’ contributions. Stuart Hoffman, DC, FICA, president of ChiroSecure, which is based in Scottsdale, Ariz., says a 401(k) not only will help a doctor save for retirement, but it can also provide a tax break when they match contributions.
You should also look at the plan like any other benefit — vacation time, sick days, or health insurance — when determining who is eligible.
“You have to think about how you want to structure it, and who you want to benefit,” says Hal Rogers, chief retirement strategist with Retirement Services in Jacksonville, Fla. “A new hire that leaves and takes your money doesn’t benefit your business any.”
A 401(k) can be set up with parameters and can exclude part-time staff, or enforce a grace period before someone is eligible for the benefit. You can also set up a vesting schedule, ensuring an employee is with the company a time before they receive 100 percent of the contributed funds. If they leave prior to that time, the match they don’t receive is allocated to others in the plan.
One other option that some choose is profit sharing. Under this program, the owner and any others who are eligible receive a percentage of the profits based on their salary.
Hoffman says this works well for both doctors and employees for two reasons. It engenders loyalty and helps retain good staff. And because it is based on salary, you, the doctor, will wind up with the greatest percentage of the profits at the end of the year.
“What the doctors are actually doing is disciplining their savings and investment and decreasing their tax liability at the same time,” he said.
One of the most important steps to figuring out the best retirement plan is to find a
Kelly recommends working with a fiduciary. Many financial advisors are paid for selling products that are based on commission, Kelly says. A fiduciary, on the other hand, will be paid by a fee and is required to act for the client’s best interests. They are required to tell you how they will be compensated and if there are any conflicts of interest.
“Make sure you understand who they are working for — you or their company,” she says.
Rogers says there are five questions that anyone should ask an advisor prior to working with them. First, do they provide estate planning services? It is best to have someone who can perform both. Next, ask them what courses they have taken in the previous year in tax planning. They should be able to show you their course materials.
Third, find out how they keep up-to-date on changes in tax law. Where do they go for professional advice and do they subscribe to any services that provide updates? You can also query them regarding the last tax law change and how it was integrated into their practice.
He says to ask to see a copy of the Uniform Lifetime Table, which helps calculate minimum required distributions from IRAs and other accounts. Rogers says they should have it at hand and should be using it regularly.
And finally, ask if they know how employees can withdraw funds from a 401(k) without rolling them into an IRA and still avoid taxes. The majority of financial advisors will say there is no way to do so, but IRS Code Section 402(e)(4) allows for this. And if they don’t know this, he says “you are in the wrong office.”
Insure the future
Another important aspect of financial planning is proper insurance coverage.
Both Kelly and Maule recommend looking at inexpensive term life insurance plans. Maule says a policy should be worth the value of the practice, cover debts they want taken care of, and provide income for the family’s future.
“When a doctor dies, they think their practice is worth X amount and the value is often about half of that — and it goes down every week it’s not sold,” he said. “Often, there is some debt and the family is hurt.”
The amount of life insurance an individual needs depends upon a number of factors: whether the existing spouse can provide income, what the expenses are, and how much debt the family has, Kelly says.
In general, a $1 million policy can be expected to provide about $50,000 a year in income if it is invested at about 5 percent interest.
“When in doubt, get as much death benefit as possible for the least amount of premium,” Kelly says.
Hoffman recommends to his clients to take a “rounded approach” to life insurance, adding universal insurance, which can accrue value over time and is more expensive.
Hoffman says to work with a trusted advisor to find out what you can afford and what best suits your needs. Someone with a young family will want to make sure they are protected, whereas someone who is older may just need to support a spouse.
Use your practice
Your practice should also be part of your retirement planning.
Maule recommends established practitioners have a secure, high-interest savings account separate from their emergency fund where they stash money to purchase an office. Instead of paying rent to someone else every month, buy a building larger than you need and lease the excess space to someone else.
“This will provide passive income that is continuous and known … as part of a portfolio to go along with stocks or other investments,” Maule says. “People at 65 are disappointed when they have counted on a retirement plan from their company and social security. I have a lot of friends who had stocks only and they have been losing their shirts.”
Rogers says you can manage a practice to sell by building a good patient list, minimizing expenses and maximizing profit prior to retirement. About three years before you want to sell, avoid putting money into things like equipment and office systems. You won’t reap the benefits and it will reduce the business’ bottom line.
And when you do sell, sell to a more established professional who can pay upfront, rather than on payments because “the safest bet for selling is to get the cash and run.”
Begin at the beginning
For someone starting a practice it is a whole different ballgame.
“Invest your money in things that are going to make you money,” Maule says. “If you are a chiropractor and can use your hands, use them, don’t spend a bunch of money on equipment that you don’t need.”
He also recommends leasing an office for younger doctors and working with advisors who can help you invest wisely and grow your practice.
Kelly adds, you should save as much as you can while simultaneously trying to pay off loans. Once those two things are tackled, then you can begin to invest in your future.
“For younger people, until they get their financial act together, they shouldn’t be spending a lot,” she says. “Stay conservative with cars, a house, and clothes until you get out of debt."
She says to pay as you go, and if you cannot afford something, do not buy it. Create a plan and stick to it.
“People start getting in trouble when they overreach their income,” she says. “Create an emergency fund and pay off your student loans. It may be boring, but it is what works.”
Tammy Worth is a freelance writer based in Kansas City, Mo., who specializes in business and healthcare subjects. She can be contacted at email@example.com.