The Challenge:

We were introduced to a medical practice with two surgeons and a staff of five assistants. The two doctors were planning to retire within five years, and they wanted to maximize their retirement savings and plan to transition their business to a successor physician. They had been funding about $32,000 each in a safe harbor 401(k) profit sharing plan that was provided by an insurance company. The fees in the insurance company’s plan were very high, and they didn’t provide any plan consulting services. 

Both doctors lived within their means, and so they had a significant amount of discretionary income that could be used to fund a higher retirement plan deduction. The doctors' primary goals were to receive some value from the sale of the practice, and shelter as much income as they could over the next five years. However, they were unsure how a buy/sell transaction could be structured, what the tax implications would be, and whether they each would be able to comfortable retire at age 60.

The Analysis:

In reviewing the doctors’ cash flow, we determined they had the resources to retain income in the business and divert that income into a cash balance pension plan paired with their existing 401(k) profit sharing plan. By moving the plan from the insurance company, we would save the doctors and staff over 50% in fees. Also, based on plan funding scenarios, the doctors could now shelter about $240,000 each in a retirement plan instead of just $32,000. 

The doctors identified a younger surgeon with an interest to buy in to the practice. We consulted with the doctors, their CPA, and their attorney to prepare the new operating agreement with an estimated valuation for the practice. Guiding the doctors through the process, we worked with their CPA to analyze the taxation and net proceeds they would receive from the sale.  

The doctors’ financial planning analysis showed that if they maximized the funding to the new retirement plan and reallocated the funds from the existing expensive, insurance-based company 401(k) plan to one of Highland's models, the probability of success was significantly improved.

The Recommendation:

Over five years, the doctors accumulated more than an additional $1,200,000 each, not including market appreciation, in their retirement accounts. Through our planning work, the doctors now had a clear path to retirement and business succession plan. The successor doctor purchased the practice, and the doctors were able to remain for another year to help with the transition while they worked part-time. This enabled them to transition into retirement rather than an abrupt transition. Following the transition, through consultations with the younger doctor we were able to redesign the retirement plan to meet his unique needs and situation while providing him the same wealth management services the original doctors enjoyed.