By Mat Ryan, Financial Planner and Analyst, Four Quadrants Advisory
If you’re a successful Dentist, you should be able to retire with several million in savings, so you can continue the standard of living you have now. Unfortunately, most Dentists aren’t doing that according to an American Dental Association study.
It concluded that the average income expected by the Dentist at retirement of 49% of current income – or $127,000 expected per year. We think this is a travesty!
To put it bluntly: if you have at least $750,000 in collections each year, you don’t have an excuse: you should be saving more. You will need to have set aside $8 to $10 million for retirement in order to maintain the lifestyle you're living now. After all, why should you take a step back once you finally reach retirement?
Here are 5 actions you need to take this year to create a retirement that will support your current lifestyle:
1. Put the right savings plan in place There are savings strategies that work well for some but are not adequate for Dentists. A Simple IRA doesn’t provide the kind of flexibility that a 401K or profit share plan does if you can afford to have one. If you do have one of these, discipline yourself to make regular contributions by setting up an automated paycheck deferral into your retirement account to fund it to the maximum amount by year’s end. And your spouse should be on the practice’s payroll as a front-office employee to maximize the amount of money you can contribute to the practice retirement plan.
To make sure you have more money available to save, you still have to think beyond even these savings instruments. For instance, do you have a $5,000 loan payment that’s about to end? Make a plan for what happens to that budgeted payment once it’s not going toward your loan anymore. You should re-invest it or put it into savings.
2. Skip budgeting - it's overrated It’s complicated and time-consuming to plan a budget, and let’s face it, are you actually going to stick to it? The better strategy is to live within your means, save proactively, and try to increase the amount you save every year. And you need to invest that saved money properly. We recommend to every client a low-cost, no-commission environment; ideally fee-only one.
3. Run your practice efficiently There are two factors to balance to make your practice as efficient as possible. The first is your production. Why not set a goal to surpass last year’s revenue, and then sustainably grow from there?
The other is your overhead level: if it’s above 65% it’s killing your cash flow, and, as a result, your income and savings stream. For every 10% you lower your overhead drops, that means you bring in 10 cents more for every dollar you collect. So if you’re collecting $900,000 a year and you lower your overhead 10 percent, that’s $90,000 more to add to the bottom line.
4. Don't "Sweat the Small Stuff" especially regarding bank accounts Balance (pun intended) is the key. By watching your cash reserves at home and work each month, you will find it easier to deal with unexpected expenses on both fronts. Remember what I just said about budgeting: live within your means, know how much you need and make sure you have enough at all times.
But too much is also unhealthy. If you have money just sitting in a bank account, it’s not working for you. Once you surpass the level of cash you need to have an adequate safety-net (we recommend 1-1.5 times the amount of monthly expenses) put that excess cash to work! If it’s in your practice account, take it home. If it’s at home, invest it.
5. Keep the cash flowing This can be difficult given the unexpected challenges that confront dental practice owners such as yourself. But every business owner faces them. The key is responding to these curve balls in a way that doesn’t crunch your cash flow.
You might be so debt-averse that you pay for a new piece of equipment in cash. Inadequate tax management could lead to a big surprise and, therefore, IRS bill at tax time. Maybe your practice hit a slow patch last June and July. No matter the issue, your response must be educated to minimize the number of crunches you have to handle.
Ironically we recommend our clients “sweat the small stuff” because if you are managing details and stay on top of problems when they’re small, the bigger issues will either never materialize or be far less traumatic. Attention to detail will make your practice profitable over the long term, and will put you in a position to have that $10 million retirement – or at least more than you are on pace for now.
What's your plan for retireing the way you want to. If you don't have one, or would like us to review it, you can contact us directly at (877) 720-6213 or send us an e-mail so we can determine together the best place to begin.