Planning for retirement while keeping as much of your paycheck as possible

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The definition of retirement is different for everyone, but most people view retirement as a scheduled date in time when they stop working. People start marking off the days on their calendar waiting for the time to pass until that date they officially retire. One common question that comes up often is what will you do next? However, the other question, for those who do not have pensions, is what do we do to prepare ourselves for a time when we can stop working for an income?

People should view retirement as a constant transition over time, not a definitive line drawn in the sand. People will reach a specific age and find out they are not financially prepared to retire, have no idea on what to do next, or continue to work because their work has become their identity. On the other note, there are people who will run the first chance they get. Since we are always trying our best to plan ahead, this can be stressful because they are attempting to juggle everyday responsibilities, and this can distract them from staying on track.

There are very few things in life where we have direct control on the outcome. Some things in life are out of our control because of variables like nature. The rest of the outcomes that are often stressed about are created by people. This can be like where your next paycheck will come from and how the stock market will perform. Since we try to balance our future with the present, let’s dive into what specific actions could be taken today to create the most flexibility and options for that one day where you no longer must work for a paycheck.

Design a systematic plan to save

When’s the last time you took a serious look at how you’re building wealth for retirement? Oftentimes people are willy nilly saving money. There might be a retirement account like an IRA or 401(k), cash accumulating inside a savings account, and maybe taxable investments. For practice owners, this might be the same story but most of the cash is being held inside the business with no true plan on how to increase business profits or actively take money to build personal wealth. Any money that gets saved is inconsistent and without any coordination on balancing risk, taxes, and access to those funds.

There is a concept that can be used where a line is drawn between lifestyle and wealth building. When we start looking at them separately, this provides an opportunity to understand how much is actively being consumed today and what remains for potential wealth building purposes. A place to start is by setting up an account outside of your personal checking that captures all income, including W2, 1099, and business profits. From that account there would be a set amount distributed periodically each month in 1 installment, 2 installments, or weekly to your personal checking. This will set a baseline on what will be consumed in lifestyle, and remaining income will accumulate, and you have a choice to start using those funds towards wealth building or consuming more into your lifestyle.

Save 20% of gross income and profits

Over the years, we have observed that people often live on 30% of what they make but only save 5%. Imagine someone who plans to retire tomorrow, what do you think is the likelihood that they can sustain the same lifestyle by only saving 5%?

During the accumulation phase of life, people find themselves taking on excessive risk to reduce the gaps while relying heavily on the performance of the stock market and economy. For people whose expenses appear out of control, and that saving 20% feels impossible, this is understandable because change is tough. If you’re a person that lives a modest lifestyle below your income, saving money can be easy. A spending plan is a great place to gain awareness on your spending behaviors and to find out what is possible to change. By focusing on a spending plan for at least 90 days this will establish a baseline on what is spent on average, especially for variable expenses that change each month like food. By using the account previously mentioned to distribute a set amount for lifestyle, over time the excess money will accumulate inside the account and as expenses change within your personal checking the rest should hopefully build up in savings. Every so often a status check should be done for those that are not consistently saving 20%.

For those that can save 20%, this should give you the permission slip to spend more. There is another option to save more money towards retirement to make the transition happen sooner. The good news is there are options. As an owner, the practice should be helping you save by withdrawing a set amount each month for personal wealth building along with a target on the business accounts to sweep any excess cash each quarter. We commonly refer to the excess as “dead cash” because this money has no purpose and there should be a set amount established to keep in the account for operations such as payroll and accounts payable.

Compound interest

Now is the time to get your money off the sidelines. Excess cash that is not growing loses spending power over time. This means as things cost more, you will need to use more dollars to pay for them. When the money is not growing, this can result in funds going down quicker than expected. By taking advantage of guaranteed assets, liquid money markets, investment accounts, retirement accounts, and business reinvestments these can all be great opportunities to continue growing funds.

Compound interest to some can feel like magic. Interest earns interest and that continues to happen over and over. The longer someone waits the less interest they will earn on their money over time. The concept comes full circle when you compare different balances. One thousand dollars earning 4% interest will produce $4. One million dollars earning 4% will produce 40,000 dollars. In most cases that interest would be reinvested to then earn more interest. The larger the balances the larger the interest.

Use interest earned to fund other assets

As your investments and assets earn interest, those funds could be redirected towards other assets to bring more diversity to your plan. For owners, most of their future is invested into the practice. Profits on the practice should be viewed as interest. The profits can be used to grow the profits more or be used to help with building personal wealth. The same is true for a liquid investment account that earns interest each year. That interest could be taken from the account and put into another asset, which might have different qualities with regards to taxes, risk, and accessibility. Whenever there are financial hardships, or income decreases, those other assets could be used to help fund other assets. This way there is control and options whenever life does unexpected pivot.

Bringing everything together

By establishing and maintaining a balance between spending and saving, the feeling of living paycheck to paycheck can be less. We often consume everything in front of us and by setting up parameters and boundaries we are causing ourselves to take a second look. As we focus on consistent savings behavior, over time assets will start to grow exponentially and the interest earned on those assets can be redirected to create more balance within someone’s plan. The best thing to do is look at how you’re approaching retirement and understand what you are doing that is within your control compared to outside of your control.

DISCLAIMER: This material is intended for general public use. By providing this content, Park Avenue Securities LLC and your financial representative are not undertaking to provide investment advice or make a recommendation for a specific individual or situaton, or to otherwise act in a fiduciary capacity. Securites products and advisory services offered through Park Avenue Securites LLC (PAS), member FINRA, SIPC. OSJ: 4200 West Cypress Street, Suite 700, Tampa, FL 33607, 813-289-3632. PAS is a wholly owned subsidiary of The Guardian Life Insurance Company of America (Guardian), New York, NY. The individuals associated with Florida Veterinary Advisors do not maintain specialized licenses or qualificatons for the financial services provided to veterinary professionals. Florida Veterinary Advisors is not registered in any state or with the U.S. Securites and Exchange Commission as a Registered Investment Advisor. Florida Veterinary Advisors is not an affiliate or subsidiary of PAS or Guardian. 7019783.1 Exp 9/26