achieving financial independence andrew tucker 1-8-16 › files › 2014 › 09 ›...

Achieving Financial Independence Andrew Tucker 1-8-16

© 2016 John K. McGill & Co 1

Andrew D. Tucker, JD, CFP®, MTWMSunset Study ClubNewberg, OR

The Affordable Care Act turned out to be unaffordable.

The elimination of file and suspend/restricted application has changed social security strategies.

The federal reserve executed the first rate increase in almost a decade (June of 2006).

The Carolina Panthers went 15-1 in a year that should have been, at best, a 10 win season.

Establish what it means to be financially independent.

Discuss some of the biggest mistakes doctors make financially and how to avoid them.

Discuss some of the tax strategies available to doctors who own their own practice.

Discuss some non-traditional ways to do traditional things (i.e. educational planning)

To provide a balance of information, entertainment, and optimistic thinking.

Not having to take the soaps at the hotel when you leave.◦ (exception: you take pleasure in collecting hotel

soap)

Not having to bring home ketchup packets from Wendy’s to refill the bottle at home.

The luxury of keeping all salable organs (including both kidneys) well into retirement.

Working because you WANT to, not because you HAVE to.

Knowing that, if something happens at the end of your career, finances are not your primary concern.

Most doctors do not have the income capacity during their career to retire without planning for it.

Dentistry is cash-flow intensive during your working years, which can create a false sense of security.

Retirement planning is easily ignored – more pressing things dominate our every day schedule.

Retirement planning can force us to have difficult conversations that no one likes having about death or disability.



Symptoms Include:

High overhead High debt ◦ (practice/personal) ◦ (payment/balance)

High taxes High personal lifestyle/

No savings Poor Investing

It is addictive:1◦ It releases chemicals in the brain (serotonin) that,

for some people, can liken the physiological response to spending to a drug dependency.

It is compulsive:2◦ Most people who have spending issues cannot

conscientiously identify it It is unsatisfying in the long term:3◦ While short term chemical releases take place, there

is a longer term “bigger buy” effect to sustain the same level of thrill from buying.

1 - Hartston H. The case for compulsive shopping as an addiction. J Psychoactive Drugs. 2012;44:64-67.

2 - World Psychiatry. 2007 Feb; 6(1): 14–18.

3- Berke JD, et al. “Addiction, Dopamine, and the Molecular Mechanisms of Memory,” Neuron (March 2000): Vol. 25, No. 3, pp. 515–32.

Stress:1◦ Seventy-two percent of adults report feeling stressed about

money at least some of the time and 22 percent say that they experience extreme stress about money.

Family Turmoil:2◦ In a study of 4,574 couples, arguing about finances was the single

strongest indicator of divorce among married couples. Physical Illness:3◦ In 26,763 women, financial troubles increased the risk of a heart

event more than any other factor, including the loss of a child or a spouse.

1 - American Psychological Association’s Stress in America study.

2 - Dew, J., Britt, S. and Huston, S. (2012), Examining the Relationship Between Financial Issues and Divorce. Family Relations, 61: 615–628.

3- National Women’s Health Study, 2015, as reported by Michelle A. Albert, M.D., M.P.H.

How Much Will You Need To Retire? (Handout) A Gazillion Dollars???



Longevity – How long will you live?

Tax Rate – What is the government’s cut?

Investment Returns – volatility v. returns?

Spending Level – The only factor where you keep complete control. How do we get it into check?

Use Quicken, Mint.com, Quickbooks, or your preferred platform◦ Mint.com is great for people who like things

automatically done and are comfortable with cloud-based services.◦ Quickbooks is great when the spouse is keeping the

books. Don’t try to track business expenses through

Mint– use your annual statement from your credit card and compare the two.

Compare to the average numbers provided in the handout

Retirement Planning Double Whammy:◦ This reduces your Assets Required at Retirement to

Maintain Standard of Living◦ Increases Amounts Available for Saving per month

Establish an understanding of what a “comfortable” lifestyle looks like for you and plan around it.

Be realistic and discerning when evaluating big ticket purchases.

Prioritize. Control impulse purchases. Don’t fall into the “RTP” trap.

It is NEVER too late to take an active approach in planning for your retirement.

Even if things seem bleak, the most important thing is evaluate your personal spending.

If you don’t know where to start, ask!To start saving money, we need to have adequate cash flow

to do so. But how?



Reduce Personal Spending Cut Insurance Costs Decrease Debt Payments Improve Practice Profits Increase Tax Savings

Fun is like life insurance; the older you get, the more it costs.

Need Insurance Only to Protect Against Risk You Cannot Self Insure Against

As Liquid Assets Increase, Insurance Needs Decrease!

Total Life, Disability, Business Overhead Premiums Should Not Exceed $7,000 Annually

Obtain Cheapest Coverage Over Time Period Until Financially Independent (Term – Not Whole Life)

Decrease Coverage Amount as Liquid Assets Grow

Avoid Costly Riders (Accidental Death, Waiver of Premium, Child Coverage)

Have Proper Coverage Over the Period Needed (Not Lifetime)

Reduce Coverages and Increase Elimination Period As Liquid Assets Grow to Decrease Premiums

Reduce Business Overhead if Mutual Assistance Agreement, Have Partners/Associate, Both Spouses Working

Increase Deductibles – Auto ($1,000); Homeowners ($10,000)

Eliminate Long-Term Care Coverage Once Financially Independent



“Some debts are fun when you are acquiring them, but none are fun when you set about retiring them.”-Ogden Nash

Big Debt Balances (Too Cold)

Big Debt Balances (Too Cold)

Payments Over the

Useful Life of the Asset (Just Right)

Payments Over the

Useful Life of the Asset (Just Right)

Big Monthly Payments (Too Hot)

Big Monthly Payments (Too Hot)

1. Use Low/Yielding Cash/ Investments to Pay Off Debt◦ Pay Off Highest Interest Rate

Debt◦ Pay Off Debt With Highest

Monthly Payment

2. Consolidate Personal Debt/Mortgages and Refinance to Reduce Interest Rates and Monthly Payments

(Use 15 Year Mortgage)

Prepare Loan Request Summary Submit to 3 Banks – Request Written Loan

Proposal Negotiate Best Rates/Terms Allow Current Bank to Beat/Match Best Offer Remember the algebra you swore in the eighth grade that

you would never use again?



4.00 6.67 7.27 8.00

4.50 7.50 8.18 9.00

5.00 8.33 9.09 10.00

5.50 9.17 10.00 11.00

Return/TaxBracket 40% 45% 50%

Sally is getting killed by the Federal Government and the State of Oregon in income taxes and is at a top marginal tax bracket of 50%.

Sally’s financial advisor has consistently achieved a return of at least 5% over the last decade, and it is safe to assume he will do it again.

Sally has a CEREC note at 7% with no prepayment penalty. Should Sally prepay the note?

Since Sally is achieving a 5% rate of return, that is the baseline rate we need to use to determine if he should prepay.

However, because Sally gets to deduct that interest, we need to adjust for deductibility.

If Sally is paying income taxes with a top marginal rate of 50%, then the effective interest rate of the CEREC is 3.5%, because 50% of every dollar paid in interest is tax savings. Therefore, Sally should not prepay.

Step 1: make more money. Easy, right?



A Blueprint for Practiceor,

How to Make Money and Keep It

1. Make people aware of the practice (marketing).

2. Persuade patients to say yes to treatment (sales).

3. Control overhead expenses (profitability).4. Save as much as possible on a before tax

basis.5. Control personal spending.*6. Don’t stop planning at retirement.

* I promise this is the last time I will harp on this point.

A. Achieving Optimal Capacity◦ Increased Marketing Expenditures (2-

6% of collections)◦ Increase Treatment Acceptance Rates

with Flexible Payment OptionsB. Reduce Labor Costs – technology

Collections $700,000Added Volume $300,000Incremental Profit

.80

Added Profit $240,000

50

55

60

65

70

75

80

85

90

95

1999 2004 2007 2015

Percentage of Optimal Capacity

90%

82%78%

70%

70% 85% 100%Marketing High Moderate Low

Flexible Fee High Moderate LowFinancing

Fees Increase Low Moderate High



Track and Monitor Conversion Rates

Should Convert 85% or More into Exams

Monitor New Patient Calls to Improve Selling Skills

Excess Labor Cost Overbuilding Excess lab/supply expense Excess debt service

Facility – Small / Efficient

Land / Building Cost Should Not Exceed 70% of Collections

Rent Should Not Exceed 7% of Collections

Additional 9% deduction on profits relating to domestic production.

Domestic production is liberally interpreted, but requires analytical procedures and record-keeping to justify the deduction.

Can be used for:◦ direct bonding◦ indirect bonding◦ CEREC or other CAD/CAM milling◦ retainers, or ◦ Printed patient records

How you are saving will directly impact how much you can save

Budget for savings (personal/practice)

Save on regular basis

Save “off the top”



Priorities:1. Tax-deductible HSA funding2. Tax-deductible retirement funding3. Tax-deductible educational funding4. Personal Savings/Debt Reduction

Age Total Saved Monthly Savings Value at 65 /6%

35 $1,500,000 30 Years $4,167/mo. $4,206,410

45 $1,500,000 20 Years $6,250/mo. $2,902,194

55 $1,500,000 10 Years $12,500/mo. $2,058,734

Difference in Saving Early $2,147,675

Annualized

Dow Jones 6.7%

S&P 500 6.0%

NASDAQ 4.0%

Bond Index 5.3%

More Savings/Assets Needed to Retire More Insurance Required Practice Value More Important

Consolidate All Cash Accounts

100% Invested in Longer-Term Higher Yielding Investments (Double/Triple Returns)



Home Equity Line of Credit – Personal

Business Line of Credit – Practice

Eliminates Disruptions in Cash FlowInvestor ReturnsEquity: 5.0%Fixed Income: 0.7%

Emotionless investing that can yield powerful results

Good Strategy For Investing In The Stock & Bond Market

Eliminates Decisions – Makes It Automatic Forces You To Invest The Same Amount Of

Money Over a Period Of Time, According To Your Asset Allocation Model

The Market is Up!

Instant Gratification – you are rewarded for your discipline

Investments made at lower values appreciate significantly!

Everyone loves a good deal, and these are some of the best.

The only sure fire way to “buy low.”

Lowers your average cost per share.



Tax Deferred Retirement Plan & IRA◦ Bonds and Fixed Income◦ Losses are not deductible – focus on reduced

volatility Taxable Accounts◦ Stock and Stock Funds◦ 15%-20% Dividend and Capital Gain Tax Rate◦ Harvest Losses to offset gains

Improper Allocation Can Cost Thousands in Taxes

Has Fiduciary Duty To Act In Your Best Interest; Brokers Do Not

Fees Paid For Continuous Advice, Meetings, Quarterly Performance Reports, Value Added Services

Fees Partially Offset By Investing Through Low Cost Institutional Mutual Funds

Income tax has made more liars out of the American people than golf. – Will Rogers

United States Court of Appeals for the Second Circuit.

Hand has been quoted more often by legal scholars and by the Supreme Court of the United States than any other lower-court judge.

Over and over again courts have said that there is nothing sinister in so arranging one's affairs as to keep taxes as low as possible. Everybody does so, rich or poor; and all do right, for nobody owes any public duty to pay more than the law demands: taxes are enforced exactions, not voluntary contributions. To demand more in the name of morals is mere cant.

Commissioner v. Newman, 159 F2d 848 (1947)

2012 2016Top Marginal Rate 35.0% 39.6%Personal Exemption Phase-Out - 2.0%Itemized Deductions Reduced - 1.0%Effective Marginal Rate 35.0% 42.6%



2012 2015Maximum Rate – Capital Gains 15.0% 20.0%Maximum Rate - Dividends 15.0% 20.0%New Tax – Investment Income - 3.8%Added Payroll Tax - 0.9%Social Security Tax Rate - Employee 4.2% 6.2%

Applies to: Interest, Dividends, Capital Gains and Most Types of Rental

Profits

Exceptions: 1. Capital Gains – Sale of Practice (Very Wrong)

2. Office Building Rental Profits3. Capital Gains – Sale of Office

Building

Are you:

Maximizing Retirement Plan Contributions? Increase Income Shifting for Education or

Support? Being Mindful to Create Business Tax

Deductions? Utilizing an S-Corp to Cut Payroll Taxes? Creating Tax-Free Income Where Possible?

Tax deductible contributions Tax deferred compounding Avoids Obamacare tax on personal

investments Protected from creditors Lower taxes on distribution

Tax deductible salary deferrals (up to $12,500 annually; $15,500 if 50 or older)

Practice matches up to 3% of pay



Tax deductible salary deferrals into plan Practice matching contributions similar to

SIMPLE IRA

2016Under 50 $18,00050/Older $24,000

Practice profit-sharing contribution

2016Maximum pay-in = $53,00050/older $59,000

Increase Allocation To Doctor’s Spouse

Decrease Staff Cost

Accumulate $2,200,000 at age 62/65 regardless of past D. C. contributions

Annual tax-deductible contributions of $50,000 - $250,000

Tiered/Cash Balance Defined Benefit and

“Add On” 401(k) Profit Sharing with 6% Practice Contribution

$14,000/$17,000 year - maximum SIMPLE $20,000/$26,000 year – maximum 401(K) Highest reasonable salary - maximum age-

weighted contribution



Reduce Personal Spending/Consume Personal Cash/Investments – Take Less Salary/Sub S Dividends

Reduce Practice Debt Payments Reduce Rent Paid From Practice Increase Profits

Set Salary At Greater of $265,000 or 25% of Collections (Safe);

Or 15-20% of Collections (Aggressive)

14-day rental income from vacation home Practice fringe benefits Roth IRA distributions

(doctor/spouse/children)

I thought I can’t fund one of those? I’m too old to worry about doing that.

With proper planning, you can have over $1,000,000 in a Roth at retirement without paying top ordinary income tax rates.

Deductible Non-deductible◦ Regular◦ Roth

Contributions nondeductible but… Earnings grow and distributed Tax-Free! No minimum distributions required at age

70 ½



Make Non-Deductible IRA Contributions Each Year ($5,500 Per Spouse if Under 50; $6,500 Per Spouse if 50/Older)

Rollover Fully Taxable IRAs Into Existing Retirement Plan (May Require Plan Amendment)

Convert Non-Deductible Contributions Tax-Free

Thereafter, Fund Non-Deductible IRA Contributions Each Year and Immediately Convert to the Roth IRA

$20,000Nontaxable

$180,000

Tax-Free

401(k)

Plan

Regular

IRA

Roth

IRA

Tax-Free

$20,000

How it Works

$180,000Taxable

Live Off Previously Taxed Practice Sale Proceeds First In Retirement; So Your Taxable Income Will Be Minimal

You Will Continue Receiving Exemptions And Itemized Deductions in Retirement

Convert Taxable IRA Amounts Each Year To Your Roth IRA In Amounts That Keep You In The 15% Tax Bracket After Deductions!



Maximum Tax Deductible Contribution $6,750 (family) in 2016; Plus $1,000 for Each Spouse 55/older ($8,750/yr now)

Earnings Grow Tax-Free

Distributions Tax-Free for Past/Present Medical Expenses

Taxable if Used for Other Purposes; Penalty Applies Until Age 65

Current Age Accumulation at 6530 $1,279,66835 $ 813,60040 $ 528,04745 $ 328,66250 $ 195,00655 $ 104,042

• Travel• Art

Most expensive car for business Corporation buys (don’t lease) with 100%

financing Corporation pays all operating costs and

deducts actual expenses Recordkeeping – At least 1 month log, shoot

for 3 months

$25,000 Expensing Election 6-Year Write-off



Business Meals and Entertainment Only 50% deductible

But…

Travel, CE Lodging Staff Meals, Parties, Outings

$36,500 penalty for non-compliance. Latest guidance - IRS Notice 2015-17 Effective July 1, 2015, the practice should no

longer pay or reimburse staffers for their individual health insurance premiums.

S corporations should continue to pay and fully deduct the cost of health insurance coverage for all doctor/owners and their families in 2014 and through 2015.

Component Depreciation (Cost Segregation Study)

Income Shifting for Educational Funding (FLP)

Tax-Free Exchange at Sale

Tax-deductible funding Tax-deferred investment Tax-free payout

Scholarships Loans Children’s Earnings



Wages deductible to practice

$6,300 income tax-free in 2016

Qualifies child for Roth IRA

Tax-FreeBegin Accumulation Age At 65

6 $2,926,70510 2,298,02315 1,692,65820 1,240,295

Roth IRAs Coverdell Savings Accounts

(Education IRAs) 529 Plans

Roth IRA Amounts Not Needed For Education Grow Tax-Free With No Penalties

Full Control over Investments

Office Building Profits Equipment Lease Profits Lab/XRay Profits



If College Age Child (Age 18-23) Provides More Than 50% of Support From Earned Income Then All Unearned Income Taxed At Child’s Rate

American Opportunity - $2,500 maximum ($1,000 refundable) for 4 years; Phased out if AGI > $80,000 (single); $160,000 (married)

Lifetime Learning -$2,000 maximum (subject to phase outs)

▪ Tax and Business Planning - John K. McGill & Company

▪ Practice Transitions - Roger K. Hill & Company▪ Legal Services - McGill and Hassan, P.A.▪ Accounting Services - Elliott Davis Decosimo, PLLC▪ Retirement Plans - PenSys, Inc.▪ Investment Management – McGill Advisors, Inc.

every step of the way

achieving financial independence andrew tucker 1-8-16 › files › 2014 › 09 ›...

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