The BRIEF®2 ADHD Form uses BRIEF-2 scores to predict the likelihood of ADHD. It is available on PARiConnect- PAR’s online assessment platform. Learn more at parinc.com.
All right, y’all. Hey, welcome back. I have a very meaningful and relevant episode here today, where we are diving into the topic of financial planning for practice owners.
I am very fortunate to be talking with Ariel Ward. She’s a certified financial planner and financial advisor at Abacus Wealth Partners. She has over a decade of experience in the field of personal financial services and in helping [00:01:00] clients develop financial clarity. She’s passionate about helping business owners grow their net worth and make better decisions with their money. Ariel also helps her clients to find their goals, stay focused on what’s important and work toward building a more abundant finance future.
I have a great connection with Ariel. She has been our personal and business financial planner over the last few years. She’s done incredible work with us, she and her team at Abacus Wealth. I just feel lucky to be able to pick her brain and share some of her knowledge with the rest of you.
In this episode, we really just a nice overview of financial planning. We talk about what that even means. How a financial planner is different than an accountant. Why financial planning is important. Why saving for retirement is important. Different options for retirement savings depending on what kind of practice [00:02:00] you have. How much to save. When to start. At the end, we get into a little bit of a discussion around investing startups like Robin Hood and Wealthfront and Betterment. Some of these apps you may have heard about and compare and contrast them with a more traditional model of having a financial planner or an in-person resource.
I think there’s a lot to take away from this episode. I don’t know that it is geared toward those of you who are in the advanced stages of financial management in your practice, but I encourage you to listen. It’s a great primer on a lot of the basics. We really get into some details that I think you can take away right off the bat and implement to get your finances under control and start planning for the future.
So, without further ado, let me [00:03:00] transition to my conversation with Ariel Ward.
Hey Ariel. Welcome to the podcast.
Ariel: Jeremy, I’m so excited to be here and ready to talk to you about money.
Dr. Sharp: Yeah, I’m ready to talk about money too. We’ve talked a lot about money here over the past two years. For anyone who doesn’t know, I don’t know if we’ll put this in the intro, but we have been working together for 2 or 3 years, and you’ve completely turned around our financial situation and it’s been pretty incredible. So, I’m excited to talk with you and share some of your knowledge with everyone else. So thanks for being here.
[00:04:00] Ariel: You’re welcome.Dr. Sharp: Let’s start off. I always ask anyone who’s on the podcast as a guest, why this work? Why is this important?
Ariel: That’s a great question. The work I do is helping people come up with a system for their money that’s going to help them have a lot of clarity around financial needs decisions they make throughout their life, and also help them build that long-term wealth that we all know you need to give us security and opportunities in the future. And I am really passionate about doing this kind of work because, first of all, money is important. We all need to talk about it more with our family and have more clarity around why we’re making the decisions that we do make with our money.
For me personally, I have gone through all kinds of attitudes around money: [00:05:00] ignoring it, spending too much of it, hoarding too much of it, and have found myself in a place where I know what I want to do with my money and I know why I’m doing what I’m doing with it. And so, I want to help my clients come to that place as well. So that place where they know what path they’re on with their money decisions and they also know exactly why they’re making a decision with their money. Why are they saving? Why are they spending money to remodel their house, all of those kinds of things?
I think when you have that kind of clarity and you have a plan for yourself around your money, it just frees up a lot of brain space. It can help you have a little more joy in the work that you’re doing since you know, that the effort you’re putting into your work is building this long-term wealth in security and opportunities. And just also gives you the ability to have the freedom to have fun with your family, go on vacation, and not [00:06:00] be worrying about where that money is coming from. Things we do with our money touches all parts of our life. And it’s just really important for us to all get a handle on it. And so, that’s why I do what I do. I want to help people know why they’re doing what they’re doing with their money and feel good about it as well.
Dr. Sharp: Yeah, I think that’s super important. You touched on a lot of things that resonated with me during that time there. The idea that we do things with money but do not know why I think is really important. I think a lot of us know, there’s a lot of emotion tied up in money and we talk about money mindset. You work with a lot of mental health professionals. I’m sure you see this a lot. But yeah, we carry attitudes about money from our family of origin or growing up or experiences or whatever it [00:07:00] might be. And we do things with money for unconscious reasons. So I love that you’re highlighting that process and bringing clarity to that process.
There’s so much that we can talk about here. I wonder if we might just start with the basics? You’re a financial planner, right?
Ariel: Yeah.
Dr. Sharp: So tell me, what is a financial planner and how does that differ from say an accountant or like these days, I think there’s an increase in external CFOs. How does a financial planner fit into the whole picture as far as managing our money?
Ariel: Well, a financial planner, first off, is someone who… Typically if you’re calling yourself a financial planner, you’ve completed the [00:08:00] certified financial planner designation and gone through some coursework studying, wills, estate planning, all of that stuff, insurance, investments, cash flow( this is all the personal side thinking through these things) and retirement. The big question for everyone is how do I save for retirement? So taking that information you’ve learned and the financial…
What I do as a financial planner is take all the knowledge and try to apply it to individuals or family situations. A big part of what I do as a financial planner is coaching and accountability. There’s so much out there now on Google, books, whatever. You can probably dig in and find the answers you need. But as [00:09:00] as a financial planner, what I’m helping you do is put together the to-do list items. So sure you need to set up an estate plan and then also the why. Why is this important to you personally? What effect is it going to have on your life and how can we get you to move forward to taking steps on these to-do list items in your financial life?
In a big picture way, what I’m looking at, I always start with looking at cash flow. Where are you spending your money? And is it how you want to spend your money? Is it reflecting what you actually want to do? So if you really have a goal that you want to take a big vacation with your family every year, is what you’re doing with your money reflecting that or is it getting spent in other ways that that’s always just going to be a dream that you get those big vacations and never a reality.
The same thing with the retirement saving for a house, all of those things. It’s putting together the actions you’re taking with that goal or value you [00:10:00] have for yourself, can we put those together? And if you’re not already doing it, how can I help you take the steps to do that? How can I hold you accountable? What’s going to be motivating for you? Cash flow is always where we start.
The other things I help with are helping clients come up with a retirement plan. So if you want to retire someday, or even if you don’t want to retire and you want to keep working forever, how can we create those opportunities for you to do either one of those things: keep working forever and also have this backup plan in case that doesn’t work out because of health reasons or whatever, or hit the goal of retiring at 50 or 60, whatever it is for yourself and thinking through how much do you need to save? Where should you be saving it? How should it be invested? All of those parts.
And then also helping you implement that plan, set up the accounts, when should you put the money in? How much should you be putting in? And then, all the other parts I talked about- insurance, reviewing what your insurance looks like, [00:11:00] what do you need to change, estate planning. I look at everything. We can’t do it all at once. It’s more of a process of going through the building blocks to getting to every part of your financial life.
Dr. Sharp: Yeah. That was one thing I appreciated about our work together is that it is very comprehensive. We were doing okay, but I think we were pretty aimless in our goals and what we were doing. So, pulling everything together and really helping us be deliberate about what we did with the money was really important. I’m guessing our situation is pretty similar to a lot of practice owners where there’s like some student loan debt and maybe like some car payments and maybe some retirement, but how much should it be? And then the practice expenses.
There are so many pieces to pull together. It was hard for me, even as a numbers-oriented [00:12:00] logical person to sort through on my own and know where to best allocate the money that was coming in. And that was one of the most helpful parts, I think, was just having some clarity around that and having you help us define our goals. That was really cool.
Ariel: Yeah. And that’s a big part of what I do is be able to be that outside unbiased third party looking at your money. Even as a financial planner myself, I need my own financial planner because I may know all the right things to do, but taking the initiative and getting myself to do them, it’s helpful to have another person there saying, “Ariel, why didn’t you do this? Or you need to make sure you put your money in your account by this date, take a look at your insurance so you make sure everything’s set for the year”.
Dr. Sharp: Right. Well, and there were times too where you were almost like a marriage counselor for us. My wife and I, as you know, were in very different places with what to do [00:13:00] with our money in the beginning. And she’s like, “We’ve got to live our lives now and let’s just spend our money and I’m like, no, we have to save everything, but I don’t really know why.” Anyway, helping through that, that was nice.
Ariel: Yeah, definitely. And that’s super caller with couples too. One person has one attitude and the other one has the opposite attitude with money. So it’s finding that in between that’s going to make both of you somewhat happy with the end result.
Dr. Sharp: Nice. Yes, that definitely happened. We’re in a good place.
Just to clarify, and this is a question that I had when we got started too, but can you distinguish a little bit. How are y’all different from an accountant? I get that question a lot, like, oh, I already have an accountant, why would I need a financial planner or someone to take that role?
Ariel: A CPA is really helpful when we’re talking about tax questions or maybe how certain expenses are going to affect your business. A CPA can give [00:14:00] you a lot of clarity on what should I expect on paying taxes here? Should I be paying estimated taxes, that sort of thing? Most CPAs I work with are very much present-focused, so focused on what can happen this year.
The way I work with CPAs is, I want to know what’s going to happen this year, but let’s think of the big picture long-term strategy. What are some things we can start doing today that might save you on taxes in the future? And then, the way a CPA and a CFP might work hand in hand is way in the advice. The CPA is suggesting you do this right now, maybe that is putting $50,000 into a retirement account. I know over here on the personal side that you maybe you have a ton of credit card debt or some other really big goal that at this point in time is more important than the tax savings.
So, [00:15:00] CPA is very important and can give you a lot of clarity on your taxes. I’m here to look at the big picture long-term planning. How do these individual decisions affect that big picture plan?
Dr. Sharp: Got you. Thanks for talking through that. I think it’s easy to get lost in all the different financial professions folks that can help us.
Ariel: So many titles.
Dr. Sharp: Yeah. Well, and when I’m coaching practice owners too, there’s also this just being conscious of recommending so many services. I’m like, well, I think you do need an accountant, but a financial planner would also be helpful. And you also need this thing. And they’re like, why? Why do I need all these? Why do I have to pay for all this stuff? But it really goes a long way. I think everybody plays an important, distinct role. That’s what I wanted to clarify.
Ariel: Yes, I agree.
Dr. Sharp: Well, let’s actually dig into some of the strategy here. To lay some [00:16:00] groundwork though, you work with a lot of practice owners, so I know you can speak to this, but can you just say why financial planning is important for us as self-employed business owners compared to a normal person who works a job and gets a retirement match and those sorts of things?
Ariel: Sure. I think the big difference between being a business owner and being an employee is that, as the business owner, you are responsible for bringing in the revenue that’s going to support your household or pay your salary for yourself. You’re also responsible for employees if you have them.
So you have a lot of financial pressures to get everything right not only to support your own household but to make sure that there’s consistency for your employees in their households. So, on that first point, there’s a lot of personal pressure for you to get things [00:17:00] right financially. And as an employee, definitely, you want to do the things to keep your job and keep that salary coming in, but most employees don’t have that extra pressure of, I also need to bring the revenue in to make my salary happen.
And then the other part, if you’re an employee of a big company, it’s likely that you have some sort of retirement plan. Somebody has already thought through what kind of retirement plan would be right for my employees. All you have to do is sign up and start contributing. Probably your employer is also contributing on your behalf. So you already have that bonus for retirement as an employee.
Business owners, it’s all up to you. If you’re going to have a retirement plan, it’s up to you to figure out what kind of retirement plan is the right one for me. If I have employees, are they suddenly eligible? It just becomes a lot more complicated when we start looking at the financial picture of a business owner versus someone who’s just an employee of the business.
And then the other part of it which we touched on is that [00:18:00] personal cash flow. Making sure you have bumpy cash flow. So one month you’re making $50,000 and the next month, that’s $5,000, how are you going to make that work out on the personal side so you’re not feeling both stressed within the business, but stress out at home because you don’t have that regular steady cash flow to support the mortgage, food, everything you need to survive?
Dr. Sharp: Right. Yeah, I think that’s a big question that a lot of us struggle with, especially in the beginning, but maybe over time too, is just how much to pay ourselves. I hear that question a lot. How much do I pay myself from my business? And it’s hard to figure that out unless you have some formula that kind of fits your salary into the bigger picture.
Ariel: Yeah, that’s always the number one question when I’m working with somebody who has a newer business in the first three years of business ownership is, am I paying myself the right amount? What should I be paying myself? That’s a [00:19:00] big question to tackle. And can it be consistent given what I’m bringing it in right now?
Dr. Sharp: Right. Do you have a general philosophy on that? I know it might be hard to nail down a specific number or percentage of income or something like that, but do you have a general philosophy in how you tell beginning practice owners how to navigate that?
Ariel: Yeah, I think the longer you’re in practice, it becomes a little easier to figure out what you should pay yourself. But let’s say, if you’ve been in practice at least a year, what I would say is hopefully at this point you have bookkeeping and you can go back and look and see, what did my revenue look like over this last year? What did my expenses look like? And what’s the average number there? So your average revenue was $10,000 a month and average expenses, $5,000 a month, you should be able to expect about [00:20:00] $5,000 per month profit. Obviously, that’s not going to be, since things change so much in group therapy practices, that’s not going to be actually true when you go into your second year.
So what I like to do is definitely taking a percentage of that. So something that can be consistent. I usually start with around 60 or 70% as a baseline. So, you can maybe start taking $3,500 a month as an owner’s draw every month and let the extra cash build up in your business, which will leave you money for it to pay for taxes. And then you might supplement that with taking, you know, when you see that the cash in your business is built up, there’s a little extra to take out as a quarterly draw. So that’s a good way to start. It’s just, what could you start relying on a regular basis for the next year and then plan to take a quarterly distribution,.
For any newer [00:21:00] business owner, that might be a good way to get some consistency and then be able to have an extra chunk every quarter, every six months or so.
Dr. Sharp: Got you. Nice. So just to make that super concrete, if you’re bringing in $10,000 a month in total, just gross revenue, like that’s all the money that comes in, your expenses eat up about $5,000 of that- So that might be like rent and testing materials and your EHR software and things like that. Do you include taxes and expenses when you are talking about it in this context?
Ariel: In the context of the bookkeeping, it’s not an expense, but it is if you’re going to take an owner’s distribution and you have that $5,000 a month profit, you’re probably going to want to keep 30% of that for taxes. And you can do that in a number of ways. [00:22:00] Usually, I have business owners set up tax savings account within their business. If you’d rather do it on the personal side, that’s okay as well because ultimately you’ll be paying the taxes on the personal side. I find keeping it within the business helps you mentally know that it’s hands-off. It’s not something you can take home and use for a personal goal as well.
Dr. Sharp: Right. So going back to our little examples, so we have $5,000 in profit and then you said about 50% is a good place to start just to be safe. So somebody would take home $2,500, set aside some for taxes, and leave the rest just to build up.
Ariel: Yeah. So maybe you could take in $1,500 and putting it into the tax account which would be 30% of that $5,000 and then the rest, just letting it sit in. You can have a separate profit savings account. It gives you both the buffer in your business just in case there’s some unexpected expense during the year. [00:23:00] And then if that expense doesn’t happen, you have it for later on the year or the year-end distribution, quarterly distribution.
Dr. Sharp: Got you. Cool. Well, let’s see. Let’s get into some more detail here. I mean, as far as a general strategy for, let’s just say retirement planning. I feel like that’s a big focus for a lot of us. And being self-employed like you said, we have to steer that ship all the way to the end. So, when you think about retirement planning, how do you conceptualize that for a practice owner? What do we need to have in our minds to be focusing on?
Ariel: Sure. I think on a very basic level, first of all, deciding when you set up a retirement plan, do you want to include your employees? If your goal is to include employees and that’s something your employees [00:24:00] are asking for as an employee benefit, you might approach this topic a little differently than if your goal is I really need to focus on putting away as much as I can for my own retirement. If I have to include the employees, we’ll work it out, but ultimately, I want to put away as much as I can for my own retirement.
There are several different types of retirement accounts. And depending on what your goal is, focusing on your own retirement or incorporating your employees, you might take a different approach.
Dr. Sharp: I wonder if we might break this discussion up into starting with just a solo practice owner who maybe has no aspirations of owning a group practice, it’s just going to be them, and then we can have a discussion about group practice owners who both want to do a retirement for their employees, and maybe don’t want to do a retirement for their employees. Could we put that structure on it? Would that make sense?
Ariel: Yeah, that makes perfect sense.
Dr. Sharp: Okay. How about a solo practice owner? What [00:25:00] does that look like as far as retirement options and planning?
Ariel: As a solo practice owner, it’s actually a little bit easier for you since you just really have to focus on what’s going to work for you tax-wise and then for your long-term plan. First of all, just getting any question out of the way of how much should you be saving or when should you start doing this? My goal for a solo practice owner would be to find out…
First of all, go back to that debt question. If you have a lot of high-interest credit card debt, I’d focus on paying that down first before contributing to retirement. That’s going to make a bigger impact long-term than starting this retirement plan. So once that’s out of the way…
Dr. Sharp: Can I ask you a question real quick?
Ariel: Yeah.
Dr. Sharp: Sorry, I’m going to jump in. I’m going to ask a lot of questions, I think. When you say high-interest credit card debt, what qualifies as high interest? How high does its interest need to be to supersede the importance of saving for retirement?
Ariel: I [00:26:00] would say anything that’s over 8%.
Dr. Sharp: Okay. So just to put that in context for folks. I’m breaking it down super simple, but most credit cards are going to be at least 12% to 15% interest unless you get some smoking credit card deal somehow. So pretty much any credit card debt, is that safe to say, is going to be over 8%?
Ariel: Yeah. That’s probably safe to say that almost any credit card debt is going to meet that criterion.
Dr. Sharp: Okay. I just want to make that because I had that question too. This is just one of those basic things. I’m like, we know we should be saving for retirement, but these high-interest credit cards really eat away at that. The math doesn’t work out. Emotionally, it seems to make sense to save for retirement, but math-wise, you’re getting a much better return by paying down high [00:27:00] interest debt.
Ariel: Right. And that’s where the financial planner comes in because we combine those emotions and the math at the same time to help you make that rational decision on doing what’s right for your situation.
Dr. Sharp: Sure. Okay, so we pay down the credit card debt first?
Ariel: Right. Pay down the credit card debt first. So once you’ve done that, the next approach is deciding where are you going to save for retirement? And when we talk about retirement accounts, we’re usually referring to a type of account that the IRS allows us to set up that gets us a tax deduction and also lets us put money away and grow without paying taxes on it. So a tax-preferred or tax-deferred retirement account.
As a solo practitioner, the two best options would be a SEP IRA or an Individual 401k. [00:28:00] So with both of those accounts, you can put up to $57,000 away in one year into one of those accounts. And so that the actual amount you could contribute is going to be based on how much money you’re earning in that year.
The difference between those two accounts is that the SEP-IRA is actually a very simple structure. There’s only one contribution and it is an employer contribution or it’s strictly based on your net profit for the year. And so, what you can contribute is going to be… You can contribute up to 20% of your net profit or 25% of your salary if you have formed an S Corp and you’re paying yourself a salary. So those are the two max numbers. And the SEP-IRA, you put the money in the tax year, you get a tax deduction that year, you’re going to invest this money and then over the longterm, so between now and when you [00:29:00] retire, hopefully, that money is growing and you’re not going to be taxed on the growth.
So you’re typically on investments. You might pay taxes on that growth over time. When you retire, you’ll be able to take the money out, use it for retirement, and you’ll be taxed in retirement income taxes. So, as a business owner, it gives you the benefit of having a reduction in your tax bill and being able to put away a large amount of money at one time for your future retirement.
Let’s take a quick break to hear from our featured partner.
The BRIEF®2 ADHD Form is the latest addition to the BRIEF Family of assessment instruments. Using the power of the BRIEF®2, the gold standard rating form for executive function, the BRIEF®2 ADHD Form uses BRIEF-2 scores and classifications statistics within an evidence-based approach to predict the likelihood of ADHD and to help determine the specific subtype. It can also help evaluators rule in ADHD and rule out [00:30:00] other explanations for observed behaviors.
Please note that the BRIEF-2 parent and or teacher form scores are required to use this form. The BRIEF-2 ADHD form is available on PARiConnect- PAR’s online assessment platform. You can learn more by visiting parinc.com\brief2_adhd.
All right, let’s get back to the podcast.
Dr. Sharp: So you said with a SEP IRA for a solo practice owner, you can put aside 20% of net profit. Is that right?
Ariel: That’s right.
Dr. Sharp: Okay. So if you’re, again, just to make this super concrete, if somebody is making, let’s say $100,000 a year, has $20,000 in expenses, then we’re looking at 20% of $80,000 to put into a retirement account. Is that right?
Ariel: Right. So that person can put away $16,000. They also aren’t going to pay taxes on that $16,000. So that’s the immediate benefit.
[00:31:00] Dr. Sharp: Got you. So it reduces your taxable income as well which is nice.Ariel: Exactly.
Dr. Sharp: Great.
Ariel: An important thing to know about the SEP-IRA is if you do end up bringing on employees, you can keep contributing to the SEP-IRA as long as your employees haven’t worked for you for more than three calendar years. So you have a buffer. If you change your mind and you start hiring people, you have about three years before those new hires would suddenly be eligible for a contribution. So that’s another good reason that SEP IRA is a good place to start because you have that longer timeline than other types of retirement accounts before employees would be eligible.
Dr. Sharp: Got you. Okay, great. And then the solo 401k.
Ariel: The solo 401k. So most of us have heard about a 401k. It was probably the most popular retirement account type. A solo 401k is a 401k that is strictly designed for [00:32:00] solo business owners. So, the idea is you’re only making a contribution on your behalf and you don’t have any employees.
With a solo 401k, we have that overall contribution limit again at $57,000, but there are two parts to it. So it’s a little different than a SEP IRA. There’s the employee contribution, which would be $19,500 for one year and there’s also the employer contribution. And with the employer contribution, you have that exact same percentage. You can contribute 20% of your net income or 25% of your salary if you’re paying yourself a salary. So those two numbers, $19,500 plus the 20% or 25% will make up your overall individual contributions limits.
So, this account, if you suddenly have a really [00:33:00] high income, so let’s say you went from earning $80,000 net income to $160,000 net income, with the SEP IRA example, you’d be able to put away $32,000 in a year, but with the 401k example, that same $160,000 net income, you’d be able to put away significantly more. You’d be able to get to $51,500 for the year.
So you can see, opening the 401k is a really great idea if you know, suddenly I have had a great year and I’d like to do something with this money that’s going to save you on taxes and set me up for success in retirement.
Dr. Sharp: That’s an important distinction. Question, does a solo practice owner have to be registered as an LLC [00:34:00] to qualify for something like that or can sole proprietors do a 401k? It seems complicated.
Ariel: A sole proprietor can do a 401k and SEP IRA as well. I think that’s an important point. The 401k paperwork-wise is a little more complicated and maybe thinking through how am I going to make this total contribution happens since there are two parts of it. And that’s where having a CPA can help you with coming up with the numbers on like, this is what you’re eligible to contribute to these two parts, and then a financial planner or investment advisor can help you get the account set up. The accounts set up, maybe it’s the part that’s a little more complicated in the SEP-IRA. There’s a lot of questions on the forum on how you’re going to structure the 401k, but the good news is once you get it set up, it’s pretty easy from there.
Dr. Sharp: Got you. We’ve talked before on the [00:35:00] podcast about S corps versus LLCs, and I’m assuming S-corp is eligible for all these.
Ariel: Right. S corp is also eligible. And that the thing that changes about the S-corp is now your employer contribution amount is based on your salary versus your net income. So, you’ll be able to give yourself 20% to 25% of your salary as a contribution if you’re an S-corp.
Dr. Sharp: Got you. Okay. I know we’re throwing around a lot of numbers and it can be easy to get lost in the numbers, but I think at least the takeaway, please correct me if I’m wrong on this, but the takeaway here is that for a solo practice owner, a SEP IRA is a great place to start. A solo 401k would likely allow you to contribute more to retirement if you were in a position to do that.
Ariel: That’s exactly right. Yeah, a SEP IRA is it’s the easiest [00:36:00] place to get started regardless of where you are in starting your business. And then the 401k is the next step up. I’ve done the SEP-IRA and now I’m in the 2nd or 3rd year of business and things are great, I have a lot more I can contribute. So probably, the 401k is going to allow you to contribute more than the SEP-IRA.
Dr. Sharp: Got you. Maybe this is a good time to ask something that maybe I could have asked earlier, but I feel like when I was waiting into all of this on my own, and I often Googled how much should I be saving for retirement? And I couldn’t be remembering. It’s been a while, but I feel like the ballpark was always something like 15% of your income. And I don’t know, is that even accurate? How should people conceptualize how much to be trying to save for retirement?
Ariel: Right. It is kind of a tricky question because that percentage amount is going to [00:37:00] depend on how far are you from your retirement deadline? How much do you already have saved? And then also, we haven’t even got into it, but in terms of investing, how much risk are you willing to take on? I think that ballpark, I haven’t dug into that, but just based on the math, that ballpark would have to be for someone who is in their 20s.
So sure, if you’re in your 20s, you can get away with putting away 15% of your income and probably turn out just fine by age 60 or 65.
I think it probably depends on how old you are in terms of what your percentage is, and also, like I said, how much do you have set aside? I think a better ballpark would be that if you’re in your 30s, probably trying to aim to save 25% of your income for retirement. If you’re in your 40s, you’re going to need to bump that up to closer to 30 or 35%, when you’re in [00:38:00] your 50s, assuming you don’t have anything saved or you have like maybe a few hundred thousand, you’re going to have to get more aggressive.
So it depends on where you’re at on progress towards retirement, but I personally feel like the 15% number is pretty low for anyone who’s not in their 20s.
Dr. Shrap: Sure. That’s good to know.
Well, let’s move to group practice owners then. How do the options differ once we have employees?
Ariel: Okay. A group practice owner can have a SEP IRA. They can also have a 401k. And then there’s this third option that sometimes makes sense called the SIMPLE IRA.
What you want to think about as a group practice owner are first of all, how many employees do you have? How long have they been working for you? Are they full-time or part-time? So all of those factors will help you come up with [00:39:00] which of these retirement plans is going to be right for my group practice. And a lot of the decision on whether or not you’re going to have employees participate in the plan comes down to what’s the overall cost going to be to the business because, with all of the plans, there is some element of the employer contribution on behalf of the employees.
So, if you choose one of these plans, you’re going to be really cognizant of what’s the effect of the bottom line. Is it going to allow me to personally keep running this business and keep saving for retirement and the way I need to save for retirement? To break it down, going back to the SEP-IRA, which is the easiest one, again, even if you have employees, it’s the easiest one to set up. The downside of that is whatever percentage you contribute for yourself, you also need to do for employees, right?
Dr. Sharp: Yes.
Ariel: So you may not do, if you’re contributing 20% of your income, you may not also be able to afford to do 20% to 25% of your [00:40:00] employee salary. And as I mentioned with that one, you do have that three-year runway were as long as employees haven’t worked for you for more than three years, they don’t get to participate.
Dr. Sharp: Sure. I think that’s important to highlight. I’ve definitely talked with practice owners who were caught unaware of that stipulation I suppose, or guideline and found themselves in a really tricky financial situation because they all of a sudden had to contribute whatever percent.
It was 15- 20% of their employee’s salary and they didn’t know if that was going to happen.
Ariel: Right. So it’s always good to start thinking about what you want to do. If you’re participating in the SEP-IRA, how are you going to pivot when your employees suddenly become eligible for it?
Dr. Sharp: Right.
Ariel: So the 401k example, with the 401k, your employees [00:41:00] would become eligible to participate in that type of plan after they’ve worked for you for at least 12 months and are also working more than 20 hours a week. So there are two parts of the eligibility there. And the same idea, if you are making a 15% contribution as an employer for your own account, you’re going to need to do the exact same amount for your employees. So 15% of their salaries.
The other part of having employees with a 401k that gets kind of tricky is this idea of, there’s this IRS testing that is basically determining if you have this 401k plan set up, how fair are the contributions being made to employee accounts. How even is it between owners or high-income earners and the employees you have who maybe aren’t performing as high of an income?
There’s a way around that which is the Safe Harbor contribution. So matching contribution up to [00:42:00] 4%. So, when you think about a 401k and allowing employees to participate, you should be thinking about contributing at least 4% of their pay so that you can avoid all this extra testing and work that goes around operating a 401k plan.
Dr. Sharp: I see. That’s important.
Ariel: Yeah. So, with the 401k, employees have the same personal contribution they can make with which is $19,500. And then you may also be if they’re eligible, they may now get that $1 for $1 match up to 4%. So that’s what you want to factor in. If you’re going to operate the 401k, you may want to consider that that’s going to add about 4% to the salaries that you’re paying employees right now.
Dr. Sharp: Okay.
Ariel: So again, with the 401k, the good thing about it is that for you personally, as the employer, it’s going to allow you to put away at least $19,500 a year, even if your employees are contributing. So it gives you that higher dollar contribution with maybe a lower cost [00:43:00] on the employer contribution side since you know you’re limited to 4% of their salaries.
Dr. Sharp: Fair enough.
Ariel: And then the third type which we haven’t talked about yet is the SIMPLE IRA. The SIMPLE IRA is kind of the in-between the SEP IRA and the 401k in terms of the cost to you as the employer, and then also the amount that you can contribute personally.
With the SIMPLE IRA, kind of like the 401k, you have the two contribution parts which are employees and yourself as a business owner. You can put in $13,500 per year into your own account. And then there is that employer contribution part, which is typically what most people do is a dollar for dollar match up to 3%. The SIMPLE IRA does require to require you to make a contribution.
And so the dollar for dollar match up to 3%, is a lower [00:44:00] potential cost to you as the employer than the 401k since you know you’re going to max out at 3%. The other part of it is that with the SIMPLE IRA, it is up to your employees to go set up their accounts. So they really have to take the initiative to go set up the SIMPLE IRA, get you the information, tell you that they want to participate when they’re eligible.
And so what I usually see is that this is like if you want to contribute as a group practice owner, but you don’t necessarily want to take on this huge cost of making employer contributions for your employees, the SIMPLE IRA is a good sweet spot because it takes a lot of employee incentive to get started, and you’re also limiting your costs to a dollar for dollar match up to 3% of pay if employees actually do participate.
Dr. Sharp: Right. Yeah, go forward.
Ariel: And one other [00:45:00] important thing. So with the SIMPLE IRA, your employees can work for you for two years before becoming eligible. Again, it’s right in the middle of that SEP-IRA and 401k in terms of who’s eligible, what you’re contributing, et cetera.
Dr. Sharp: Right. I know we’re getting in the weeds a little bit with the details of these plans, but I think it’s important because this is something that comes up so much, especially these days for group practice owners, there’s a lot of talk about how to make our offers more competitive for employees. We have a lot of competition- companies that are trying to hire therapists. And so, having, having a good sense of what we can offer as practice owners is important.
We, as you know, ended up landing in the SIMPLE IRA territory. That may be fairly permanent. I don’t know. We may be on the way to a 401k. I’m not sure, but it [00:46:00] is a nice intermediate step to offer something, but not a huge impact on the bottom line.
Ariel: And you talked about two important points, which is as the business owner, it’s important that you have a really good understanding of what is available to me to offer to my employees because ultimately understanding these plans if you start a plan, it falls on your shoulders. So it is important to do your research before you start offering one.
And then the second part that you just mentioned, which is that you want to be competitive but you also want to know what your cost is going to be. So having a good understanding of how it’s going to fit into your long-term budget is important as well.
Dr. Sharp: Right. Yeah, I think that’s a trap that a lot of practice owners get into. This is a bigger discussion, but just paying employees too much or maybe just generally not having a good sense [00:47:00] of their numbers and what we can afford to pay our employees or what we can contribute and benefits or any number of other things and then eat into profits or revenue, right?
Ariel: Yeah, definitely, it takes some planning and thinking through what is it that you’re trying to build? What’s your long-term goal there?
Dr. Sharp: Yeah, that’s a really good way to put it.
Let’s see, what else is there to say about retirement planning either for solo or group practice owners?
Ariel: I think the other important thing about retirement planning is what are you going to do with the money once it’s inside this SEP-IRA, 401k, or SIMPLE IRA.
There is a lot of information and noise out there about investing. You don’t want to just put this money in your account and let [00:48:00] it sit in cash because ultimately the goal is that the money that you contributing now is going to grow so that you have an income in retirement, and hopefully it’s growing more than inflation, which you expect to be around 3% in the long run but really it’s growing even more than that.
For most people, the goal might be to get a 7% return or something anything close to that so that they have money in retirement and they can rely on it for the rest of their life. The easiest way to get there for business owners is having some sort of investment plan that includes stocks or bonds, which I understand, that’s a whole new topic we’re switching to here, but that’s the other important part. Once you have the money in there, what are you going to do with it? How are you going to invest it?
[00:49:00] Dr. Sharp: Yeah, that’s a great question. I would have skipped over that whole part because I just assumed that people kind of knew, when you say for retirement, the idea is to put it in an account that will grow and earn interest over time. It’s not like you’re pulling that money out of the account at any point. It’s like you put it in and you forget it and make sure that it’s in hopefully an interest-bearing account or fund.So let’s dig into this a little bit. I’m trying to think of how to ask the questions. When people think about investing, I have friends who ask these questions, which is funny to me, but I have friends who were like, which stocks should I invest in? And my understanding is that that’s maybe not the best approach to retirement investing. Is that fair to say?
Ariel: That’s very fair. [00:50:00] So with retirement investing, starting with stocks- that’s a good place to start, but it’s the idea of how are you going to just pick one stock and put all your bets on that one stock. This one company is going to take me all the way to retirement and it’s going to be amazing. That scenario is pretty unlikely. We can look back at stock market history and see that the stocks from 50 years ago aren’t exactly, maybe they aren’t around now or they’ve gone out of business or they’re not doing as well as they used to.
So with investing, especially, if you’re investing in stocks, the approach is the more companies you can invest in, the more stocks you can buy at these companies, the better off you’re going to be in the long run, the smoother your growth is going to be. What I mean by that is that, if you go back and look at the stock market over a long period of time, it’s an [00:51:00] upward slope. If we go back and look at the history of an individual stock, we make may see that it’s more of a jagged climb up. And maybe, in the long run, the stock is still increased in price, but you had a lot more volatility or changes in price over time.
So ultimately, the more you can place your hands on these different companies on how they’re going to do, the more likely you are going to get to that 7% to 8% return that you need over the long run. I think this is the question that a lot of people get. There are so many options out there, where do I get started? Maybe it’s just easier to put it in cash. So that’s why I brought up that point and don’t just put it in cash. Don’t just put it in something that’s easy.
One easy approach is looking at buying an Index fund, which would be [00:52:00] a mutual fund where multiple people have put their money together into this fund so that they can buy a whole bunch of different companies. What the index fund part means is that you are going… the manager of that fund is going out to an index like the S&P 500 or it might be the Russell 2000 and buying every available stock on that index.
There’s not a lot of magical stock-picking or say that I have some special insight into these companies, you’re just going, this is what’s available. I can buy a whole bunch of companies at once. Let’s put them all in this mutual fund basket container, and you as an individual investor can participate in that mutual fund by buying shares. So what you’ve done now is by buying a few shares of this mutual fund is you’ve now taken part in everything that’s available in the S&P 500 or the Russell 2000, whatever it is that that index fund represents.
The ultimate idea is that you’re taking this investment money and invest it in a lot of [00:53:00] available companies out there versus one or two that you have some special insight about.
Dr. Sharp: Yeah, which is nice because it’s like they do the work for you and you don’t really have to do anything. I mean, it’s as maybe sounds complicated as we explain it, but literally, when you sign up for these plans, they ask you what fund do you want to invest in and you just pick it and that’s it, the money goes into wherever it goes and someone makes sure it buys that fund and you don’t really have to do anything.
Ariel: Right, it’s pretty straightforward. And depending on what company it is, Vanguard is a great option and they have a lot of educational pieces out there if you want to read more about what you’re investing in. And theree’s a whole lot of guides to help you walk through the questions that ultimately will get you to what type of investment is best for me or which of these mutual funds should I be investing in? So, Vanguard is a great place to [00:54:00] look for information on that.
I think that the question could I have a lot of clients that you’re asking about, we have heard so much about Beanstalks and people making tons of money on these individual bets. I think ultimately the thing with investing is not getting carried away with what’s on the news, whatever the hottest thing is right now, that’s where we can go wrong as investors is getting swayed by what the media thinks is going to happen next or what 10,000 people on there on the internet have told us is the next hot pick.
It’s really taking a long-term and very diligent approach to investing. Index funds, easy way to do it, easy way to stick with an investment plan as well.
Dr. Sharp: Yeah. I’m glad that you brought that up because I think like you said, these days, all that stuff is in the news and it is so easy to get [00:55:00] wrapped up in like how can I jump on and find the next thing that’s going to make a lot of money in a short period of time. Maybe it’s like some sort of cryptocurrency, maybe it’s these meme stocks. And if you don’t know what that means, that’s totally fine. But these stocks shoot up like crazy because of manipulation. It’s like shiny object syndrome, I think. This is my flaw, I don’t know, unless you have a really, really good understanding of what you are getting into, it’s not really something to like dabble in. I don’t know unless you’re just like very risk-tolerant and you’re willing to say like, hey, I might lose every single bit of this money. I’m just kind of playing around, you know?
Ariel: Yeah. That’s the exact right approach. It’s fine if you want to participate and see what happens, but it’s really [00:56:00] limiting your investment in individual stocks or whatever the hottest trend is to what you can afford to lose.
And I think another thing to think about when we’re watching what’s happening in the news and watching all of our friends make money on these amazing stock picks they made is coming back to like, what is my long-term plan and how do I have a way to get there? And if you can remind yourself, “My long-term plan is retirement. I’m already invested in the XYZ Index fund. That’s projected that it’s going to get me to where I need to be. Why do you need to grasp after this investment? You don’t need to because you’re already on track. You’re already on the track that’s going to get you where you need to go. You don’t have to take the risk to potentially into that 1% chance you’re going to become a multimillionaire overnight. That’s not going to happen because, in the long run, you’re on your path to becoming a [00:57:00] millionaire by putting away money consistently and stayed invested.
Dr. Sharp: That’s so tough. I mean, retirement savings is not sexy, it is not rewarding. It’s like the ultimate long-term reward, delay gratification, but it generally works.
Ariel: That’s the thing I always say about investing. The investing you need to do for retirement is very, very boring and that’s just all there is to it.
Dr. Sharp: Sure. I’m glad that you highlight that. And that’s okay. If people are feeling bored with it, that’s totally normal and that’s fine.
Ariel: Yeah.
Dr. Sharp: I did want to talk just a little bit before we wrap up about the other components of retirement. So, there hopefully might be social security when we retire. I say we people in their 40s, and [00:58:00] some of us might have the option of selling our practices as well. Let’s start with the selling the practice thing. Have you seen many practices or practice owners who have actually been able to do that and have it be some kind of meaningful contribution to their retirement income?
Ariel: I have not had the experience of going with the client through that process yet. Definitely, it is a possibility out there. The way I would approach it as a financial planner in terms of, what is the retirement plan look like if you have this business that you could potentially sell is, you don’t want to have all your eggs in any one basket. You mentioned social security. For those of us who are not close to retirement, it does feel a little iffy whether or not it’s going to be there.
For myself and other people my age, I would not be reliant on the [00:59:00] fact that social security is going to be that stable and therefore USA retirement income source. The same thing with the investments you’re making for retirement, keep doing that and keep doing it consistently. But then again, let’s not put all of our hopes and dreams on that one retirement account supporting us through retirement.
And the same thing with this business that you potentially could sell. Hopefully, you can sell it. It’s going to be an additional either product money you can put into your investments, or maybe alternative you say as the owner and you have a really great management team and you’re able to keep collecting income from it. But ultimately, looking at selling the business as just a piece of the overall puzzle, so sure it can be done. And if you build your business in a way that somebody else wants to take it over, that can be an amazing source of income for your future retired self.
[01:00:00] I think that just overall, I would approach it as one of the parts of retirement, not I’m going to build this amazing business and hope that somebody wants it in the future as well.Dr. Sharp: Sure. That makes sense. What are your thoughts on some of the emerging technologies around investing? I’m thinking about things like Wealthfront or Robin Hood, like app-based investing. I feel like I’m hearing advertisements for that stuff all over the place and haven’t really looked into it much. What do you think about some of these options?
Ariel: The two that you mentioned, what’s great about them is it’s gotten a lot more people interested in investing in this idea that you can put your money to work for you by buying into different companies. I think that element of it is really great that more [01:01:00] people are interested in how the stock market works and how it can help them build long-term wealth.
Particularly with Robin Hood, with that platform, from what I understand about it, you can buy portions of individual stocks. If you only have $100, you may be able to buy 5 or 6 or 20 different companies with that $100. And so, you’ll get a little bit of diversification for a little bit of money. I would look at a platform like Robin Hood, is it a place to put play money, maybe not for retirement, but if you want to see what you can do to try out some different ideas you have about companies out there that you think may take off in the future, that’s probably a good way to do it with a little bit of money.
The other platform, you mentioned Wealthfront, and then there’s another one that’s similar to it, which is Betterment. What I like about Wealthfront and Betterment is that, if you’re someone who isn’t [01:02:00] working with a financial advisor or financial planner, those two platforms offer a way to have a really well-diversified portfolio and also have automatic contributions to take a hands-off approach to investing. So you can go through their questionnaire and tell them all the details about your finances and your feelings of the stock market and whether or not you’re willing to go through the ups and downs and they’ll spit out and create for you a portfolio that matches up with like your timeline, how much risk you’re willing to take on and what you need to happen with your money. All you have to do is set up the account, start making automatic contributions and they take care of the investing, keeping your account balanced. And they’re pretty low cost.
So something like that, Wealthfront, Betterment, Robin Hood, they can take care of the investing part. The other [01:03:00] part that goes alongside that is getting personalized financial advice. So that might be the only part that’s missing. But if you’re looking for a way just to get started in investing without having to learn everything about it, it’s a really great way to get started.
Dr. Sharp: That sounds good. I appreciate you talking through that. And just to say, I think everything has its place. It sounds like everything has its place and it depends on what you might need. I know I’ve said this already, but for us, having someone to talk back and forth with and bounce ideas off of, and to have you say, no, don’t do that. Let’s do it this way. Just giving us clarity and peace of mind was super valuable for the part of life that we were in. That was, that was really helpful. So it just depends on, on what people might need.
Ariel: Yeah, exactly. Everybody has a different need in terms of financial advice and it’s great that in this new world we’re living in, there are [01:04:00] options for people to start building wealth with specifically investing in stocks without having to pay hundreds of thousands of dollars over their lifetime to get the sale financial result.
Dr. Sharp: Sure. Well, this has been good. I feel like we covered a lot of ground. Hopefully, folks have a better understanding of investment options and why it’s important. If people want to reach out to you or get in touch with you, where can they find you?
Ariel: Sure. One option is you can email me directly at ariel@abacuswealth.com or you can go to our company’s website, abacuswealth.com and we have a get connected site, so filling out that form would connect you with the team of financial planners at Abacus Wealth.
Dr. Sharp: Cool. Well, thanks again. It’s good to see you.
Ariel: Thanks [01:05:00] for having me on. I enjoy being here.
Dr. Sharp: Okay, everybody. Thank you so much for checking out this episode on financial planning. I hope that it was helpful. I know for me that I wish I had had this information 7 or 8 years ago when I was in the beginning phases of my practice or gosh, even 12 years ago when I started my practice. My goodness. I was so lost with finances for the first two years. So hopefully, you found some helpful information here, a couple of resources in the show notes for you to check out including Ariel’s contact info and a book that she recommended as well.
If you have not subscribed to the podcast, I would love for you to do that. If you have, I would love for you to tell a friend or two about it so that we can keep spreading the word and getting more people hooked up with quality information about testing and assessment. [01:06:00] I will be back with you on Monday with another clinical episode, so stay tuned. Enjoy your weekend in the meantime.
The information contained in this podcast and on The Testing Psychologist website is intended for informational and educational purposes only. Nothing in this podcast or on the website is intended to be a substitute for professional, psychological, psychiatric, or medical advice, diagnosis, or treatment. Please note that no doctor-patient relationship is formed here, and similarly, no supervisory or consultative relationship is formed between the [01:07:00] host or guests of this podcast and listeners of this podcast. If you need the qualified advice of any mental health practitioner or medical provider, please seek one in your area. Similarly, if you need supervision on clinical matters, please find a supervisor with expertise that fits your needs.