Partner: Are You Saving For Your Future?

Written by Annika Cushnie, CFP®, CIMA® on January 1, 2016

Becoming a partner or owner of a professional services firm can be a major opportunity from both a career and financial standpoint. On the financial side, we have seen clear trends emerge regarding specific wealth planning issues that need to be handled such as cash flow planning, income tax planning, estate planning and asset protection. However, there is one pitfall that seems to catch many by surprise. This is the lack of discipline while working to systematically create the personal wealth needed to sustain their lifestyle in retirement.

Typically, as highly paid professional service providers such as attorneys, CPAs and physicians gain experience and grow their practice, their level of earned income increases significantly over time. The income can be paid in a variety of ways including guaranteed salary payments, monthly budgeted capital distributions, lump sum capital distribution bonuses and/or simple draws from the business throughout the year based on the discretion of the owner. As advisors, we typically see that as income goes up, there is a proportional increase in taxes and lifestyle. What does not typically increase is the amount of money set aside each year to build the nest egg needed to eventually support the partner and their family in retirement.

Many professional service firms — especially the larger ones — have a series of retirement plans in place that partners contribute to annually, including 401(k)s, profit sharing plans, cash balance plans and long-term incentive plans. Often, the long-term incentive plan is designed to pay out over several years (five years for example) and provides some recognition of the value of the billings or business the partner has built. These plans provide a good structure for establishing the foundation of retirement assets for the partners. However, the big disconnect (or denial) is that in most cases, even though the partner contributes the maximum each year, these company savings plans simply will not be enough to fund the lifestyles to which they have become accustomed when they stop working. In fact, they are not even designed for partners to save enough because the IRS limits the annual contributions that are allowed. Without setting aside an additional piece of their overall income each year, many partners run the risk of having a rude awakening as they approach retirement and realize that too much of their income has been spent instead of put aside for the future.

If we change our perspective on what it means to be an equity partner from a financial standpoint, we should view annual bonuses not as “earned income”, rather as a return of the value the partner has provided in helping the business grow. This is an important paradigm shift in thinking because in most cases, there won’t be a liquidity event where the service business is sold and the partner is rewarded with a large sum of money. Therefore it makes more sense to invest these funds (or a portion of these funds as determined by the partner’s wealth strategy) in a long-term retirement portfolio since they represent the value of what the partner has built over the years, and what they will need to live off of after they are done billing clients for their services and time.

Many attorneys, CPAs, physicians and other business owners stay so busy serving their clients and building their practices that they don’t find sufficient time to fully and appropriately address this critical wealth planning issue. At Brightworth, we have deep expertise in guiding our clients through the process of answering one of the most important questions regarding Wealth Advisor financial independence: how much needs to be accumulated over time to serve as the foundation for retirement income? Each year on an ongoing basis, we can examine the specifics of our clients’ projected current year compensation and design an optimal current year cash flow strategy that meets both their cash flow needs (for expenses and taxes) as well as their long-term savings goals. Taking this disciplined approach and monitoring the progress along the way is by far the most prudent way to keep the lifestyle that a partner has invested thousands of hours to create.