By Doug Fettig, MBA, CPA
There comes a point in the lifespan of your dental practice where you may start to wonder if you make enough, saved enough, or just have enough. How much is enough? For some, “enough” refers to the freedom to retire and no longer work, the ability to pay for the things you want or the amount necessary to provide a comfortable lifestyle for your family.
We all spend and value things differently so “enough” will depend on your individual savings goal and spending habits. While we can’t create a one-size-fits-all plan to generate “enough” for everyone, we can outline a financial planning framework that yields an attractive income stream.
It all starts with securing and building a strong financial foundation.
Between the average student loans from dental school, the cost of purchasing a practice and the additional costs of the building and improvements, a dentist may accumulate $1,500,000 to $2,500,000 in debt in the early years of a practice.
For those starting a family, the home mortgage becomes a new source of debt. Purchase a home that enables your family to live comfortably without draining your practice of precious financial resources. Obviously, this decision is highly personal based on your values, needs, and activities. It’s easy to get carried away by enthusiasm during the sales process. A healthy dose of financial reality ensures that you make a decision that feels good in the long run.
Over time, you will build wealth by paying down that debt and growing the equity in your practice and your retirement plan.
Build wealth year by year over the life of your practice.
Dentistry is very profitable for those who secure the right practice and manage it efficiently. According to the Bureau of Labor Statistics, the median income for a dentist is $149,500, but our average general dentist makes over $300,000. Specialty practitioners typically realize even greater income. As your practice matures, begin to diversify your assets by investing more and more into a tax-qualified retirement plan.
In 2015, a 50-year-old dentist with the right 401(k) Profit Sharing Plan can set aside $62,000 for retirement ($56,000 plus $6,000 catch-up contribution if they are over 50 years old). If the dentist is married to a 50-year-old, another $24,500 can be set aside. If the dentist pays a combined federal and state marginal tax rate of 40 percent, the after tax cost of these savings amounts to $34,600. By adding a cash balance plan to the practice and operating it in combination with a 401(k) Profit Sharing Plan, the dentist will be able to increase contributions up to $314,000 at a reasonable cost for the staff.
In addition, maximizing your retirement funding – by funding a Roth IRA and developing an after-tax investment strategy – will allow you the flexibility to control your tax bill in retirement by structuring distributions from your different “buckets” of funds. As your practice matures and your debt load eases, a wealth advisor can help you craft investment strategies consistent with your age, risk tolerance, and preference.
Your practice is the financial vehicle that will carry you through life.
As you near retirement, there should be a substantial amount of equity built up in your practice. Recent sales show three sources of value that will contribute to the amount saved for your retirement:
- Building and improvements ($800,000 – $1,500,000)
- Goodwill, which accounts for your practice’s reputation and associated revenue stream from established patients ($500,000 – $800,000)
- Equipment and Accounts Receivable ($75,000 – $150,000)
Just like it takes regular fill-ups, repairs, and maintenance to keep your vehicle on the road, it also takes up-to-date technology and equipment to keep your practice operating at maximum efficiency. Growing your practice efficiently will allow it to become the financial vehicle that takes you down the path towards building true wealth.
So – do you have “enough” for retirement?
When planning for retirement, consider all your resources and your own individual spending habits to determine what “enough” looks like for you. A back-of-the-napkin approach would show that if you had after-tax proceeds on the sale of your practice of $575,000 and your building of $800,000 as well as $1.5 million in retirement funds and $150,000 in after-tax savings, then you would have $3,025,000 of available assets for retirement, excluding your home. Applying a “prudent withdrawal” strategy of four percent per year of retirement assets would result in yearly withdrawals of $121,000 plus your Social Security benefits.
A financial planning tool called a “Monte Carlo Analysis” can discern your optimal retirement distribution amounts based on your assets, spending patterns, life expectancy, earnings, and tax rates. You should have an analysis prepared several times prior to retirement as well as after the sale of the practice. It sets guideposts on current spending so that you’ll have “enough” as you age.