THE MILLIONAIRE DENTIST PODCAST

Episode 66: TIME TO START THINKING ABOUT RETIREMENT

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EPISODE 66: TIME TO START THINKING ABOUT RETIREMENT

Casey and Jarrod welcome Stacy Phillips, a Certified Financial Planner and Analyst at Four Quadrants, to discuss all things retirement and that no matter your age you should start thinking ahead.

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EPISODE 66 TRANSCRIPTION

Announcer:
Hello, everyone. Welcome to the Millionaire Dentist podcast, brought to you by Four Quadrants Advisory. On this podcast, we break down the world of dentistry finances and business practices to help you become the millionaire dentist you deserve to be. Please be advised, we do speak with an honest tongue and may not be safe for work.

Casey Hiers:
Hello and welcome. This is Casey Hiers back at it in studio today with our cohost Jarrod Bridgeman. We also have a special guest Stacy Phillips, a CFP, Certified Financial Planner, and a real breath of fresh air with knowledge and all things finances. Today we're going to talk on retirement. That's probably something our listeners are mildly interested in. How can I retire? How do I have enough to retire? What are the best ways to save for retirement? Stacy, thanks for joining us.

Stacy Phillips:
Thanks for having me, guys.

Casey Hiers:
Jarrod, we're going to just pepper him and we're going to learn a lot today about numbers. And honestly to our listeners, a lot of this information you're going to hear is probably going to surprise you and may give you a little heartburn, but that's okay. Let's start slow.

Casey Hiers:
Stacy, let's just break it down. By the letter of the law, what is a retirement account and what are some of the different savings vehicles that a practice owner can use?

Stacy Phillips:
That's a good place to start. A lot of people don't even understand just the basic types of accounts. So we have qualified accounts and non-qualified accounts. Qualified is-

Casey Hiers:
Hold on, I'm lost already.

Jarrod Bridgeman:
I hear you.

Casey Hiers:
I'm kidding, I'm kidding.

Jarrod Bridgeman:
I was going to say, I don't know.

Casey Hiers:
No, please continue.

Stacy Phillips:
So qualified accounts are what we would consider retirement accounts. Those are something you invest in pre-tax, and the earnings are tax-deferred. A non-qualified account is your take-home dollars, that's your after-tax money. So the conversation kind of starts there as to what is a retirement account versus any other account.

Casey Hiers:
Okay, so let's break that down. I know we were briefly talking on this earlier, all the different things you hear people talk about. I'm putting something into an IRA, a simple 401k, profit sharing, it goes on and on and on. So it's line item those out.

Stacy Phillips:
The point of our conversation today is really to explain to people how just a retirement account or plan alone is not going to be enough to get you to where you need to be in retirement. So basically you start out with maybe an IRA. You're looking at like $6,000 a year that you can contribute to a traditional IRA. That's obviously not going to add up to a ton of money over your lifetime.

Casey Hiers:
It's a good start.

Stacy Phillips:
Yeah, you can start there. Then you look at like a simple IRA. The limit on that would be about 13,500 a year. And then a step up from there would be a company-sponsored retirement plan, like a 401k plan. A deferral limit there for somebody under the age of 50 would be 19,500 a year that they could defer into the 401k, so now we're getting up into a higher dollar range.

Jarrod Bridgeman:
So at this point, we're not even hitting 50,000 though.

Stacy Phillips:
Yeah, we're not even close to 40.

Jarrod Bridgeman:
Not even close to 40, I don't think.

Stacy Phillips:
Nope.

Jarrod Bridgeman:
Okay.

Stacy Phillips:
So 401k plans have several other features that people may not be aware of. One of those that we utilize very often is an employer match portion. So there may be like a six percent match that the employer will kick in, so whatever the employee defers, the employer will then match a hundred percent of that up to six percent of their salary. A lot of the dentists may be making about 300,000 a year, so there is a cap on how much you can match on and that's $290,000 a year. So if we assume somebody making 290, a six percent match is going to get them about 17,400 additional dollars deferred into their 401k account.

Casey Hiers:
Okay, so that traditional 401k plus the match, you're what, 36,900.

Stacy Phillips:
Now we're at like 36,000 or whatever you just said there, Casey. And if you start doing the numbers of saving that every year, maybe 20 years until retirement, maybe eight percent return on your investments, you'll start seeing those numbers. And if you're looking at it closely, you'll figure out that that itself is not going to get you to where you need to be retirement-wise.

Casey Hiers:
Most of the practice owners I talk to if they have done those things they feel really good about it because most practice owners are not even doing that. But to your point, saving 369 as a dentist who has the quality of life as a doctor, and dentists can be spenders, and that's okay, they work hard, but 36,900 is not going to get there. We always talk about our clients saving a hundred thousand dollars in their sleep a lot of times. So how do they take it to that next level then? What are some other vehicles for retirement savings that practice owners aren't doing or aren't tapping into?

Stacy Phillips:
Another untapped resource would be profit-sharing component of the 401k plan. Obviously, not everyone's going to be in a position every year to do that, but if you add the profit-sharing onto your standard deferral and the employer match, you can do up to $57,000 total per year into the 401k plan.

Casey Hiers:
Okay. So that trifecta, those three areas, $57,000. I would say one out of 15 practice owners that I speak with are saving over 50 if they're being honest. And so those three things right there are typically not done, and that's at 57,000.

Jarrod Bridgeman:
So I guess my question would be is if you're saving 57,000, let's say you maxed out those things you just mentioned, how old would you need to be to start saving that amount right there to actually be comfortable? And how old would you be when you retire, you know what I mean?

Stacy Phillips:
Right. And actually, to answer your question, it would be how young would you have to be started investing?

Jarrod Bridgeman:
That's what I mean, yeah.

Stacy Phillips:
So you'd have to be like probably 30.

Jarrod Bridgeman:
Wow.

Stacy Phillips:
If you're going to save that amount of money until retirement.

Casey Hiers:
All right, so you've walked us through the traditional vehicles of savings. When does brokerage come in? When does that next level come in?

Stacy Phillips:
Well, before we get there, let's stay on the 401k plan for one second because another component of that is if your spouse is on the payroll of the practice. Because then we can add another deferral of potentially 19,500, and another portion of the match, and then another portion of the profit sharing. So we can increase that number above that 57 by adding the spouse in there.

Casey Hiers:
Okay.

Stacy Phillips:
So once we've maximized everything there, then we're sitting here thinking what else can I do? Well, then we have to talk about the non-qualified side, that's your take-home dollars. So once we realized now that we're doing everything we can on the 401k side or the retirement side, but we know that's still not going to be enough, that means we have to start saving some of our take-home after-tax dollars. And we do that in a brokerage account, and that is basically a liquid investment account. And we are capturing some of your take-home pay and putting that away in this brokerage account, and it's going to grow over time eight, nine percent. And that's going to be the other component to get us to the total amount of dollars we need in retirement to feel secure.

Casey Hiers:
Okay. Well, I love how you broke that down. Somebody can be doing a lot of really good things, but many are saving 20, 30, 40, maybe they're feeling really good saving that 50. They could get up to 75, 76,000 a year savings with the spouse on there and all of those matching and all of that. But to get to that $100,000, $150,000, which is very doable, the brokerage is the way to go with that.

Stacy Phillips:
Absolutely.

Casey Hiers:
Okay.

Stacy Phillips:
And another thing that you have to remember as well, on a qualified account that is going to be taxed at ordinary income. So Uncle Sam's going to take their 35% or whatever it is, so you can't really look at that total dollar amount. You have to consider that's all taxable.

Jarrod Bridgeman:
A third of it's going to be gone.

Stacy Phillips:
Absolutely.

Jarrod Bridgeman:
Yeah.

Casey Hiers:
Okay.

Stacy Phillips:
And then on the non-qualified side, you get a bit of an advantage. There when you start withdrawing dollars out of that account, it's going to be taxed at capital gains, which would be maybe 15 or 20%. So that's quite a bit less than potentially 35% on the qualified side.

Casey Hiers:
So probably already know the answer to this question, Stacy, but when should a dentist or a practice owner start saving and investing? I think yesterday's the answer, but we'll attach some numbers to this. Just walk our listeners through that. And here's the caveat, these folks get so much debt early, that's emotional. They want to get rid of debt. Here's your take-home message, you can have debt reduction strategies and retirement savings strategies at the same time. Don't focus on reducing your debt because it's emotional. Kick the can down the road, then in your forties start to get to that next thing of saving for retirement. Right?

Stacy Phillips:
That's a very good point. A lot of younger dentists, they are debt-averse so they will end up, if possible, paying cash for equipment they're purchasing. That can really hurt you in the long run. Our preference would be to use financing, low-interest financing, and then those dollars you save by doing that, you're able to invest in a plan at an early age. And the compound interest over time really helps you out in the long run.

Casey Hiers:
Yeah. So no big surprise, but start saving something as early as possible.

Stacy Phillips:
Absolutely.

Jarrod Bridgeman:
Well, that's something I just learned, because I am very much a let's try and pay off my debt now and worry about the rest of it later. That's very interesting-

Casey Hiers:
Listen, Dave Ramsey, everybody knows him, loves this book.

Jarrod Bridgeman:
Oh, he's a great chef.

Casey Hiers:
I hear... different Ramsey. His strategy I think is good for a lot of folks, but when you a practice owning dentists, producing the numbers you're producing, collecting, and the access to all of that that you have, I hear all too often that they're just married to this Dave Ramsey no debt then save. And it really handicaps a practice owner.

Stacy Phillips:
Absolutely.

Casey Hiers:
Let's shift to, I guess we did touch on how a dentist can save more money, but when can you pull money out of retirement account, the different benchmarks for that, what that means?

Stacy Phillips:
Yes, that's another important thing to remember is on the retirement side, those dollars are designed to be pulled out when you are retired. So if you decide, okay, I'm going to pull out $100,000 at age 50, well guess what, there's going to be a 10% penalty on that withdrawal. In addition, as we mentioned earlier, that's all a 100% taxable at ordinary income. So you're going to get a major hit if you withdraw those dollars early.

Jarrod Bridgeman:
So you'd go from potentially 100,000 to, what, 60, something like that?

Stacy Phillips:
Yeah, it's going to hurt you a lot. Retirement account is designed for retirement, and we really need to stick with it.

Casey Hiers:
Well, I guess that's a nice thing about brokerage that has a little more flexibility and fluidity, right?

Stacy Phillips:
Absolutely.

Casey Hiers:
You can put X amount in, but if unforeseen issues come up you have access to it. There's pros and cons to all of it, but adding that retirement savings vehicle to your strategy gives you the flexibility.

Stacy Phillips:
It does. It gives you that liquid cash that's available over there in the brokerage if something pops up, you need a new roof on the house, you need some quick cash. We can take that out of the brokerage, don't have to worry about invading the retirement accounts.

Casey Hiers:
So pre-COVID when I would travel around and speak, the question I would inevitably get asked by a room full of 50 or 60 dentists, and many of which were practice owners, was well how much is enough? How much do I need? How do I know if I have enough money to retire? But the first response is there's a lot of variables that go into that, everybody's situation is very different. But we really did try to find some general answers for people, because it's incredible the way they save, the team they have to help them save, they don't know when they can retire. They don't know how much they need to retire. That's something we tell our clients from Jump Street, right? We plan that out and show them, and it's real clear. So to our listeners, if you don't know how much you need and when you can retire, there's your sign, there's a red flag that you need to challenge the folks that handle that for you, or find people that can do a better job at it. But how would you address that question?

Stacy Phillips:
I think for starters, you need to have a plan in place. If you don't have a plan, you really don't have anything. So that's where it all starts, that's why you need a financial advisor, you need an accountant to help you have a plan in place to kind of reverse engineer what that number needs to be based on what your current income is, and what you think it's going to be in the future, what you think you're rate of return is going to be. There's so many things that go into that. We talked about all the different components of retirement plans and brokerage accounts, all of that works together to kind of help you develop what that number is.

Casey Hiers:
Mm-hmm (affirmative). We actually put some pen to paper on this. And we've touched on it before, but I want to touch on it again. This can give people some heartburn when they hear about this. The dirty little secret in every room full of dentists is they under save for retirement, and how much do I need? We're not arrogant enough to try to answer that question for everybody. That being said, in general, the annual spending, again averages across the country, average annual spending for a dentist, around $20,000 a month, $240,000 a year. Again, averages. Most spend more, some spend less. But at that spend, generally speaking, and those that say, well, when I retire I'm going to spend less and have less debt. Most people don't want to reduce their lifestyle in retirement. Most people want to travel, most people want to take their grandkids to Disney.

Jarrod Bridgeman:
Well yeah, you have a way more free time. A lot of people end up feeling very bored, I would say, in retirement a lot of times.

Casey Hiers:
Do you spend more money, Jarrod, when you're busy working or when you have free time?

Jarrod Bridgeman:
When I have free time.

Casey Hiers:
Ding, ding, ding. And so I always get that, well, I'm going to spend less. Okay, maybe you will, but that's not very much fun. And in reality, it's probably not going to be the case. But if you want to retire using that annual spend of around $240,000 a year, if you want to retire at age 60, 3.778 million. I mean, that's just to cover your lifestyle. And we're saying at eight percent of return annually, we're making some general statements. Life span of 90. I know we have a lot of older practice owners who their spouse may be 10 or 15 years younger, and sometimes they only think until they turn a certain age. And the question is, well, do you want to leave any for your spouse? And they go, "You know, I didn't really think of that." And those variables go into play. For our clients 3.778 million dollars in retirement, what would we think of that?

Stacy Phillips:
Not much, to be honest with you. You have to think about it, if you're making $300,000 a year, that's what, just in raw numbers, like 10 years worth of your annual salary. That's not nearly enough.

Jarrod Bridgeman:
If you're at 60, that puts you at 70.

Casey Hiers:
Yeah, no. And so again, we did this exercise because we get asked this a lot. If you're a practice owner with a million-dollar practice or more, you should have eight digits.

Stacy Phillips:
It's going to take a lot of money to maintain your current lifestyle, so you really have to plan ahead and have a plan in place.

Casey Hiers:
And it's not even you're going to need it, it's there to capture. It's there to capture if you have the practice, that's a message. It's there, don't settle. But yeah, and somebody said, well, I love dentistry, I'll practice a little more. Well, if you're 65, you need 3.466 in this scenario, which again we find this scenario anemic. We find these numbers very low, but that gives people an idea.

Casey Hiers:
So here's the zinger. If you're currently 45 years old and you want to retire at 60, how much do you think you need to start saving every year at 45 to retire at age 60, with the idea that you need about 3.778 million?

Stacy Phillips:
Off the top of my head, I'd say over a hundred thousand dollars.

Casey Hiers:
Yes, $124,600, almost $125,000 you're going to need to start saving if you want to retire at 60. And if you want to retire at 65, about $70,000. And so the message is get going, get started. Selling your practice should be the icing on top, not the pot of gold at the end of the rainbow. Once I Uncle Sam takes his cut, that's going to last a couple extra years, maybe.

Jarrod Bridgeman:
Well, I think part of the problem also is for a lot of people, not even in the dentistry world, is when you're 40 years old you feel like, ah man, sixties a long time. It is 20 years, but that sneaks up on you real fast.

Casey Hiers:
It does, yeah.

Jarrod Bridgeman:
Real fast. All of a sudden I turned around and my kids like 10 years old, who knows.

Casey Hiers:
Well and in that scenario, at age 40 if you want to retire at 60, it's less. You need to start saving $75,000 a year. But the messaging is, there are a lot of vehicles and avenues to utilize to save for retirement. Most people, you got to look out for yourself. Unfortunately, a lot of the financial planners and accountants and investment folks out there, they're working in a vacuum. And for them, you're doing better than most and so they're fine. But as a practice-owning dentist, who is a high achiever, who has put in a lot of effort to get where they are, it's so sad when they have to get back into practicing because they didn't plan accordingly.

Stacy Phillips:
Absolutely. And we really push hard every year, updating everybody's plan, making sure everybody's on board with the plan, to understand what it's going to take to get us to where we need to be in retirement.

Casey Hiers:
And listen, this is a robust topic. We wanted to just dip our toe in. Obviously, if any listeners out there have any questions, we're available to field those questions. I'm happy to get an initial conversation going, but start saving yesterday and you're going to need to save a lot more than you think you do for retirement. But it's an important topic, one that almost all practice owners need to hear.

Casey Hiers:
Gentlemen, I appreciate you being on today. Stacy, thank you for giving us some of those pearls of wisdom.

Stacy Phillips:
Thank you.

Announcer:
That's all the time we have today. Thank you to our guests for their insight and for sharing some really great information. And thank you to you, the listener, for tuning in. The Millionaire Dentist podcast is brought to you by Four Quadrants Advisory. To see if they might be a good fit for you and your practice, go on over to fourquadrantsadvisory.com and see why year after year they retain over 95% of their clients. Thank you again for joining us, and we'll see you next time.