Some retirement thoughts

by David J Bilinsky

I was at a funeral the day I realised I wanted to spend my life with you
sitting down on the steps at the old post office the flag was flying at half mast
and I was thinkin’ ‘bout how and maybe it is time to live

Words and Music by E
Recorded by The Eels

Okay, so how we have grown! Seemingly not so long ago we started our practices, watched them grow through the years, met our billing targets for the practice and satisfied our clients, ourselves and our partners’ expectations. Along the way (hopefully), we have met the love of our life, fulfilled our familial and domestic responsibilities and are now looking forward to a long and enjoyable retirement. Or are we?

Do lawyers ever retire? Well, in some cases it is a sad fact that many of us don’t simply because we can’t afford to. Lawyers, who are very conscious of meeting their duties to their clients, may not be so careful when it comes to financing their own (well deserved!) retirement. We are an independent lot but that independence has its price. Moreover, saving is not easy– doctors have taken to selling Amway!

What can we do from a practice management standpoint to put away some gold for this golden time (and perhaps leave a bit of an inheritance to our near and dear)? Assuming retirement is a goal, let’s examine some suggestions for achieving it in style:

• Start now. Establish a retirement plan. How? First, when do you wish to retire and what do you want to do when you get there? Having the decision being made for you is not particularly fun and can result in unexpected costs. Make a list of the things you want to do and haven’t and when you would like to do them. Have your spouse/significant other do the same. Talk about it. This will give you an indication of the lifestyle expectations and level of income you will need to support it.
• Determine the after-tax income required in your golden years. Add in all the extras besides the basics–after all you don’t want to just exist, right?
• Determine your life expectancy: if you are currently 65, then as a male you can expect to live a further 15.7 years, 19.88 if you are female. But if you are 45 today, then you can expect a further 32.14 years of life, 37.44 if you are female. Planning for a fair number more, unless you have divine knowledge, is prudent. Then add in the tax bite.
• Select a discount factor, or interest rate that you can expect to receive on your investments. This is vital. Too high and you will underestimate the amount to be set aside. Too low and you will overshoot your target.
• There are many methods to estimate retirement requirements. Here is a ballpark method: Let’s assume you wish to receive $50,000 per year from age 65 to 87 (22 years). Choose an investment or Discount rate (r) (say r=.05 or 5%). The present value (PV) for that income flow at age 65 is:

where t=22 and r=.05, is $658,000. That means that you must have $658,000 at age 65 to receive $50,000 a year at an interest rate of 5% for 22 years.

• Now, determine how much you must set aside in each year from now to your chosen age of retirement. In our example, we must calculate how much we must put away in each year after taxes to accumulate to $658,000. Lets continue our example by assuming you are presently 45 years old and plan to retire at age 65.
• Start by calculating the present value (PV) of $658,000 20 years from now. This present value is:

where t=20 and r=.05, is $247,994 today.

• Now we need to know how much to set aside in each year of the next 20 years to equal $247,994 today.

Annual contribution = where t=20 years and r=.05, is $19,800.

• So we must sock away $19,800 in each of the next 20 years at a rate of return of 5% to assure ourselves of our assumed income level during retirement. No wonder so many of us continue to work after age 65!
• In this example, many factors have been ignored, such as inflation, multiple compounding periods and tax treatment. Moreover, the numbers change if you make different assumptions on rates of return (r) and desired income levels and the like.
• Having determined how much to put aside, determine how you will do this. As lawyers, can we reasonably expect to sell our practices prior to retirement? The amount to be received for a practice typically is not large – or at least not as large as you may think. I have been told by accountants that 1x annual earnings is a rough upper limit.
• Can you bring in an associate who can take over your practice over time – and cash you out of your practice gradually by adding to the income that you take out from the practice?
• Does your firm have a buy-or cash-out if you are a partner? If so, how much can you expect to receive?
• Now, determine how you will create your retirement nest egg. RRSP’s? Real Estate? Stocks, mutual funds, bonds? Gold? Each investment has its risk and its rate of return. There are two theories on diversification: One, divide the risk by having several different types of investments over many industry groups. In this way, you are less prone to market fluctuations. Otherwise, you must put all your eggs in one basket and watch that basket! Get a good investment advisor. Pick up The Wealthy Barber by David Chilton. The Barber’s advice is simple: save 10% of your income each year and wisely invest this money. Read, read and read.
• Budget into your current lifestyle the setting aside of your retirement funds. Make this a priority--now!

If we take timely steps to plan for when we will no longer be practising, hopefully we can all rest at night not worrying about financial need at the time we hang up our gown. With planning and resourcefulness, we can think about how we are able to provide for our family and ourselves in retirement and how, maybe, it is time to live and enjoy our well-earned golden years.

David J Bilinsky is a partner at Lakes Straith & Bilinsky and a principal at Integral Management Inc.

This article originally appeared in the December 1998 issue of BarTalk and is reproduced here with permission of both the author and the Canadian Bar Association, British Columbia Branch.