Increase Your Income By Over $650,000, Cut Taxes, And Improve Quality Of Life By Working Part-Time In Retirement
May 2017 ISSUE May 1, 2017Transitions General/Other
This is a Free Article
Join Today for Hundreds of Resources Like This
No obligation, no credit card.Free 30-Day Trial Membership
During our initial meeting with new tax and business planning clients, we ask the doctor and his spouse what goals they would like to accomplish. In most cases, the doctor responds: “let me know how much I need to accumulate to maintain my standard of living in retirement, and when I get there, I’m selling out and retiring, no questions asked.” In reality, once doctors accumulate the assets they need to achieve financial independence, that’s not what usually happens. As retirement approaches, doctors realize that emotional and psychological factors are just as important as finances to a successful retirement.
Below are 5 reasons you should consider working part-time in retirement to improve your finances and quality of life.
1. Increase chances for successful practice sale – Many doctors have built large successful practices over the course of their careers. In their minds, maintaining practice collections, or even increasing them, is not a difficult or risky proposition. However, potential buyers have a completely different perspective. They are heavily burdened by record levels of student loan debt, and are facing a future in dentistry increasingly dominated by greater competition, corporate dental groups, and discounted fee managed care plans. Those increased risks have a funny way of being manifested as the practice sale closing date approaches.
Want to make sure that your buyer shows up at closing? Offer to work part-time following the sale to help maintain the practice production. Psychologically, it’s very important. It doesn’t matter that the doctor doesn’t want or need your efforts to maintain the practice production. If the prospective buyer knows you are willing to help, and not walk out the back door, it provides an emotional “safety net,” helping to assure that he will show up at closing.
2. Justify a higher sales price – Likewise, agreeing to work part-time after the sale is critical to getting a higher sales price. It doesn’t matter what the practice appraisal says. If you’re planning to walk away and the buyer is not confident that he can produce at your level, he’ll demand a reduced purchase price, or walk away from the deal altogether. Again, agreeing to work part-time after closing for a reasonable time period (up to three years) will help give the buyer confidence that he can maintain the practice and therefore pay you the appraised sales price.
3. Maintain practice-related tax deductions – Retiring doctors’ biggest gripe? They’ve lost the ability to write off retirement plan contributions, health insurance, medical reimbursement, business car, travel, continuing education, meals and entertainment, cell phone and other practice-related perks. Working part-time after the practice sale gives doctors an opportunity to continue to pay these expenses on a tax-deductible basis, for huge savings.
But you have to do it right. Avoid the trap that 90% of doctors fall into when they allow the buyer to treat them as an employee in their practice. Showing all of your earnings on a W-2 and then trying to deduct these practice-related expenses on your personal return is a losing proposition.
Rather, have your corporation enter into a Services (independent contractor) Agreement with the buyer’s practice (corporation) to provide clinical services, which will benefit both parties. That way, all income for post-closing services will be paid into your corporation, not to you individually. The corporation can continue to pay modest salaries to the doctor and spouse ($26,000 annually each), with $24,000 for each spouse ($48,000 total) tax-deducted as 401(k) salary deferrals. In addition, the corporation can pay for and deduct all practice perks, and distribute any remaining S Corporation profits as a dividend distribution, free of federal and state payroll taxes. Getting this right can save doctors $20,000-$30,000 in taxes annually.
4. Increase income and delay retirement plan/IRA drawdowns – Obviously working part-time after the sale provides additional income for the doctor to cover his personal living expenses. This allows the doctor to delay tapping into his retirement plan, IRAs and personal investments to fund his living expenses. What’s not obvious is how much this benefits the doctor financially.
Consider a doctor who has accumulated a total of $1,500,000 in retirement plan and IRA assets by the time he sells his practice at age 65. If he goes “cold turkey” and stops practicing altogether, he will need to tap into these funds immediately to meet his personal living expenses. Paying out this amount over 30 years at a 6% investment return would yield a monthly income of $8,993.26, or $107,919 annually.
Conversely, if the doctor works three years following the sale on a part-time basis and covers his personal living expenses through his efforts, it’s a totally different story. The $1,500,000 in retirement plan and IRA assets grows to $1,786,524 over these three years. And assuming the same life expectancy, that balance will be paid out over three fewer years (27 rather than 30) at a 6% return. That generates a monthly income of $11,147.65, or $133,772 annually. That increases the doctor’s retirement plan/IRA payout by $25,852 a year, or 24%. That’s an extra $698,031 of income in retirement! What a slam dunk financially!
5. Improve quality of life – Doctors who work part-time in retirement live longer, healthier lives with less disability. Why? They remain physically active, maintain social connections through the practice, and a sense of purpose through improving their patients’ lives. It also keeps them mentally challenged, keeping their minds active and their brain working properly. All of this translates into improved quality of life for the doctor and spouse.
The McGill Advisory content is provided for informational purposes only and does not constitute legal, accounting, or other professional advice.
Copyright © 2021 John K. McGill & Company, Inc.