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Road to retirement. Leveraging investment vehicles requires careful consideration
A successful financial plan should offer you the choice of allocating profits back to the practice or into a more diversified portfolio.
If you are at all like the principals in many other veterinary practices — particularly those with young, growing operations — you have a large portion of your personal assets invested in your practice. For some, this may be necessary in order to ensure the continued survival and growth of the practice. Often, however, veterinarians and other professionals are faced with the question of whether to plow the profits back into the practice or whether it might be better to establish a separate nest-egg.
Presumably, one of the main reasons why you chose to open a veterinary practice was to be able to enjoy a certain standard of living and personal wealth. Today, that established veterinary practice probably generates a major part of your personal income. Obviously, your practice deserves your main attention and priority in time and necessary working capital. But investment planning is important, too.
Investment planning involves finding the best type of investment for the income generated by your veterinary practice. The preferred investment vehicle will vary depending upon a desired lifestyle, his or her temperament, retirement goals and the timeframe available to achieve those goals. Although investment planning shouldn't require pulling back from the veterinary practice, it might suggest that you should build the capability to do so, if you ever desire.
By having several kinds of investments, such as stocks, bonds (both general and corporate), real estate, and perhaps precious metals, you greatly reduce the chance that a particular economic or legal change will devastate your investment fund.
Practice as an investment vehicle
Have you examined your veterinary practice as an investment vehicle as opposed to that practice serving as your own job-replacement gadget or a much-needed service to patients? Examining your practice as an investment vehicle provides another vantage point that evaluates and fine-tunes the operation as well as helping you to decide where your extra savings or practice profits would produce the best return.
It should not surprise anyone that small businesses are a growing industry. U.S. government statistics show that about two-thirds of the country's economic growth in the last decade has occurred in the small business sector. In fact, your successful veterinary practice might be the most profitable investment you can make.
Often, however, veterinarians desire income from a source or sources outside the practice. A second source of income, be it dividend and interest income generated by a nest egg, other investment income or even income from another business, should be considered a safety net as you operate your veterinary practice. Thus, it is important to choose how and where to invest. Re-investment in your practice might help ensure its success. Alternatively, you might want to invest elsewhere to provide that safety net.
While investment philosophies are varied and debatable, the process of translating a stable and adequate income into the achievement of your economic goals begins with planning. Through the development of a personal financial plan, for example, you will be able to identify and reach your monetary goals by deciding how best to pay yourself, spend and invest your money and take advantage of tax-saving opportunities.
Investing in the veterinary practice can take a variety of forms. Loans to the practice, properly structured and treated as arm's-length transactions, for example, can provide a higher rate of return than lending or depositing the money in the local bank. If you factor in tax-saving opportunities, then personally owning the building that houses the veterinary practice and leasing it back to the practice can be another option. This strategy can generate rental income and tax deductions.
What type of income would best fit into your plans? That is where that all-important financial plan comes into play.
A successful financial plan should offer you the choice between allocating profits back to the practice or into a more diversified portfolio. In other words, your financial plan should do for you the same thing that your practice does: increase your personal wealth.
Over time this financial planning process should enable you to rely less on earned income, or the income that you derive from your veterinary practice, and more from unearned income, generated from other investments, such as stocks and bonds.
Most financial plans involve four steps:
1) Identify what you already have. The first step requires a personal inventory of your wealth, income, expenses, insurance policies, wills and the like. You must know where you are financially before you can decide on goals and the steps necessary to achieve them.
2) Decide what you want. You must set your goals and quantify them in dollars and the time needed to achieve them. Admittedly, establishing a dollar figure for the amounts needed in order to maintain your present lifestyle a number of years down the road can be a complex process involving inflation and future value. Keep it simple by thinking in today's dollar value.
3) Determine how to reach those goals. This is the heart of the financial plan. You must figure out what should be done to achieve your goals, or adjust them so that they become attainable.
The 55-year-old principal just now establishing a financial plan to enable him or her to retire in 10 years cannot achieve financial security or any desired lifestyle by placing money in low-yielding savings accounts. Conversely, although risk is generally equated with return, few veterinarians would risk their investments with stock in startups or risky fast-growth companies.
4) Implementing the plan may be the most important step. After all, many think about it; few plan, and even fewer actually implement a strategy.
5) Maintain your plan. Even the best financial plan can sour with age. You need to keep your plan current by tracking investment performance and adjusting your financial plan for changed circumstances.
Properly handled, the investment planning process should not, in any way, require you to retire or pull back from your veterinary practice, but it might suggest that you should build the capability to do so, if you so desire.
The importance of financial planning should be in writing. If you write it down, you will not need to worry about remembering all of the factors that contributed to your plan. If circumstances change, updating that financial plan will require much less time and effort.
For any veterinarian who might be uneasy about implementing his or her financial plan, a legion of attorneys, accountants, financial planners, stock brokers, bankers, insurance agents and the like stand ready to help. You can seek help on a particular part of your plan or merely a particular question. Or, perhaps a general review of the plan is warranted.
Some financial planning professionals, including some highly qualified and competent planners, are skeptical or even hostile to plans prepared by anyone else. If this is the case with a particular financial or investment professional, you should be able to discover it during your initial meeting (which the planner will often offer free of charge). Shop for an adviser as you consider whether to re-invest in your veterinary practice or create a separate nest egg.
Mr. Battersby is a financial consultant in Ardmore, Pa.