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If you are an owner or partner in an accounting practice the chances are you've established a 401(k) or similar plan and are making the maximum payments into it, whether pretax or post tax as your circumstances permitted. The tax-sheltered buildup of assets is very important and provides a firm base for your retirement cash flow. You just have to not screw it up with the wrong type of investments or inattention. These retirement accounts will be a core foundation of your wealth and you should not skip payments into these accounts.
When I refer to wealth, I am referring to the base you will establish from which your retirement cash flow, and the security it will provide you with, will come from. It is possible to have substantial net worth, but minimal cash flow. An example is a significant residence and two vacation homes, a boat and a great art collection. By all measures you would be counted among the rich, but none of these would provide cash flow. My concern is how you will pay for your living costs when you stop working. You will do that out of cash flow and not from illiquid assets. Concentrate on building your investment portfolio.
If you are a solo owner or a partner in a practice you likely will be anticipating receiving funds from either the sale of your practice or the buy-out from your remaining partners to provide a further base from which you would receive cash flow from. I suggest that this not be depended on. You can anticipate it and do whatever you can to maximize the future amount, but do not depend on this. Things, circumstances and conditions change as does the economy, the availability of buyers, the retention of clients, the sustainability of fees, lingering health issues of you or a loved one, personal liability litigation and interest rates. Get what you can when the time comes, but do not depend on it.
Other sources of wealth
Your children? It is possible, but I suggest you fuhgeddaboudit.
Sale of your residence. Not likely since you would need to live somewhere else. Further, if you do not use those proceeds to buy another house, you would need to use the income, and perhaps some of the principal, to pay your rent. This doesn't work.
Social Security. This is a definite to count on. I also suggest you wait until you are age 70 to start your benefits. This will add 24% to your annual benefits and it will be guaranteed to last your entire lifetime. Do not succumb to the fallacious logic that if you died before a certain number of years, you would lose out and should have taken it as soon as you were able to get your full benefits without waiting for the added 24%. If you die beforehand, you will lose nothing since you will be dead! However, if you do not die prematurely, you will receive a 24% greater annual payment that you cannot outlive. The second spurious argument is that you could get the benefits and invest it better. That ain't so for two reasons. 1) Your benefits would be reduced by income taxes on 85% of the funds thereby reducing your "investable" amounts. 2) It is extremely unlikely you could reasonably invest the after-tax cash flow where you could do better than a 24% added benefit each year.
Investments. This works and would be in addition to your retirement accounts. A suggestion is to start adding funds on a regular basis as you are doing with your retirement accounts. And be smart about your investment decisions. To accomplish this, you might need to earn additional amounts from your practice. Make this a goal and price your services accordingly. Reread my previous article with the link above.
Annuities. These are another form of investing and should be integrated with your investment plan.
Mortgage. Your wealth increase will be hampered by interest payments on any mortgages. Develop a plan to reduce your mortgage as quickly as possible. Just adding a small amount to each payment would work wonders. Unless you have an older mortgage with a very low interest rate, chances are you would not be able to earn more on safe investments than your mortgage interest rate.
Credit cards. Reducing this debt is a no-brainer and should be attacked as quickly as possible. While the mortgage paydown might need some number crunching, credit card debt elimination is a must do.
Kid's college payments. This is not a wealth-building method but a wealth retardant. If you are facing college costs for your children, make that a priority and do not be overly concerned about anything else, other than fully funding your tax-sheltered retirement accounts. Here is a plan I recommend to clients. Make your children's college costs a major priority. This will usually have to be paid while you are still making mortgage payments. Do both and do not worry about added funds for your retirement. When your children are finished with college it should also coincide with your mortgage balance being greatly reduced. At that point deposit the amounts you were paying for college and the mortgage into your investment account. 10 to 15 years of continuing this would add up to a pretty decent investment account. My rule (copied from Stephen Covey) is to make the main things the main thing. Do not get overly anxious about not having a built-up investment account. Take care of your kids first.
These are some suggestions to build your wealth and establish a secure cash flow in retirement. Consider what you want, but in any event, the sooner you get started the better off you will end up.
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