Do You Have a Lottery Retirement Plan?

According to several published resources, more than 90 percent of us have an unpredictable plan for maintaining our lifestyle and income fully at age 65. In a profession and industry that generates our levels of personal income, this is unforgivable. Unless of course we have consciously chosen to live up to our income instead of on less (and understands the consequences of failing to accumulate, preserve and perpetuate wealth).

Even though I did not play the lottery, I was lucky. I had a close friend who was a CPA who made me (asked me strongly) to borrow $4,000 when I first married at 21 years of age (because I did not have it) and fund IRAs for Denice and me.  The funds we borrowed and invested our first three years, will likely yield more than $700,000 at age 65 (assuming 10 percent return on investment). That is 64 times what we put in and represents six doubling periods (70 divided by rate of return equals the doubling period in years). For several years after that, we had the $4,000 and funded our IRAs. Then we began living on 90 percent of whatever we made in a year and put away more aggressive sums for retirement. Smart? No way!  Just Lucky. If I did not have my buddy telling me what do (or if I had not listened), I might have bought a nicer car, bigger house, taken fancier trips or worn more Hugo Boss suits and Rolex watchesÖall of which I do now at age 50, because my retirement house is in order. And no, I still do not buy lottery tickets.

At the Pankey Institute, we spend time helping participants understand the financial foundations that are necessary for making sound decisions that accumulate, preserve and perpetuate wealth. Michael Gerber (a recent NADL Visions 21 meeting speaker) was right in his E-Myth series of books. We have been trained as technicians, not in how to run a business; we have the expertise to custom manufacture things but often lack the knowledge that leads to sound business decisions that positively impacts our futures. 

Before taking any retirement or investment advice, you should consult experts in those fields, but I think we should become adept at the following skill sets.

1. Live on less than we make so that we are financially free to invest the difference. In our profession, there is adequate income to invest at least 10 percent of what we make so that we have funds to accumulate. If we can temper our instant gratification urges just a bit, it will pay us huge dividends down the road. Similar to building our restorations on a solid occlusal foundation, we should build solid financial foundations for our self, staffs and families.
2. The time value of money is what allows us to accumulate wealth easily. Starting early is the key. For example, one of a 22-year -old set of twins sets aside the maximum IRA contribution ($4,000 this year) for six straight years and then nothing else ever again. The other, starts at age 28, (when the first one stops investing) and begins to save the same amount every year. Twin number two will not catch the first twin until age 65! The early saver only put away $24,000 total and did it early, while the late bloomer had to save and invest a total of $152,000 over 38 years to get the same result ($1.4 Million dollars).  Your next assumption is correct if you did both, you would accumulate over $2.8 Million dollars by investing just $4,000 annually and starting early (assumes a 10 percent return).
3. The cost of capital is another important factor. Some debt and interest rates are not as bad as others because they are deductible. Credit cards should be paid down of course, but, I would rather not see someone pay off their house unless they have already taken care of their retirement investments. Being out of debt is great, if, we have funded our tax deferred and tax free retirement vehicles fully.  Otherwise, we may be trading the peace of mind that being debt free brings for a lottery ticket in the end. I knew a laboratory owner my age (50) who bragged about being debt free, but only had $80,000 saved for retirement. He would need to save another $78,000 per year (at a10 percent return) until age 65 to get the same $2.8 Million our twins were chasing in the above example. His house and the building the lab are in are free and clear, and there is a salable interest in the laboratory business itself, but not even close to $2.8 million.

If you are young, simply get started with good counsel.  Live on less and save 10 percent or more of what you make. You can use IRAs, 401ks, and other qualified plans. Pay down bad debt and load your tax deferred and tax free retirement accounts early and often. The more you can get in early, the bigger it grows.  A $65,000 car at age 30 feels better than a $35,000 car now, but the extra $30,000 you spent would be worth nearly a million dollars at age 65. Understanding the true financial impact of our decisions puts us in power to choose well and create a preferred future. 

One very exciting way to front load a retirement investment is by leveraging your accounts receivable into a compound growth curve without factoring.  This innovative financing can allow younger lab owners to put hundreds of thousand of dollars into an investment that can grow and be used tax free. This loan, secured against your  A/R, is a deductible business expense and the invested principle grows inside a universal life insurance policy tax free. You can then borrow against it at retirement and use the proceeds without paying taxes on them. The 37-year-old dentist, who bought my practice in 1998, has this kind of a plan and simply pays the interest on the loan during his working years and will have nearly $3 million when he retires. Yowser!  And he gets to use it tax free!

For older technicians and dentist like me, we have lost the time value part of the equation. We have fewer doubling periods left. For some, it will still make sense to enter into the kind of investment described above, but we do have other options. If we are going to put larger sums away to play catch up with the young investors, we can build wealth and avoid taxes in some of the whole-life programs that are still in play. By setting aside $30,000 at age 52 for the next 12 years, one can accumulate a $1.4 Million dollar death benefit that can be borrowed from tax-free at age 64. Incredible way to accumulate, preserve and perpetuate wealth in a single investment. It provides a source of retirement income while maintaining a significant corpus to add to our legacy. 

Making these financial decisions should include your trusted advisors, accountant and investment counsel. Finding someone with the savvy, knowledge and philosophical congruence to you is critical.

I welcome your comments and experiences and am happy to hook you up with more information about the investment vehicles described in this article. They are real and tax tested they only seem to good to be true.