Playing the Long Game
As the average retirement age of dentists continues to increase on a yearly basis, one can no longer rely on standard retirement principles to secure his or her financial future. Historically, the national retirement rate of dentists has fluctuated in correlation with the state of the economy. Although an economic downturn, whether it is due to an event as significant as a recession or one of lesser impact, such as a short-term decline in the stock market, directly affects the "nest egg" that professionals work so hard to build, designing an effective retirement plan requires more than navigating the ebb and flow of the economy.
To maximize your potential, it is important to diversify your retirement strategy at every stage of your career by addressing recent regulatory developments, pursuing creative investment options, consulting the experts who are crucial to create a well-rounded portfolio, and learning how to successfully transition a dental practice.
Retirement is often the first time that dentists will lack steady cash flow, and with no pension, they have only what they have saved and invested for this day. Retirement planning is an individualized process because each dentist has a unique set of requirements and desires related to their lifestyle. However, there are some guidelines, tools, and tips that can benefit all dentists, regardless of their specific goals.
Strengthening Your Retirement Strategy
Many dentists are nearing the traditional age of retirement. Currently, 40% of dentists are 55 years or older, whereas just 27% were in that age demographic in 2001.1,2 However, in a recent survey, 46% of participants said changes in the economy are forcing them to continue practicing past their expected retirement date.3 According to the American Dental Association (ADA) Health Policy Institute, the average dentist currently retires just before turning 69, whereas in 2001, the average retirement age was about 65.4 Generally, there is plenty of work for dentists to continue working late into life, as the supply of dentists is not in equilibrium with the market. The Health Resources & Services Administration estimates that there is currently a shortage of 10,802 dentists in the United States.5 However, the per capita supply of dentists in the United States is projected to increase through the year 2037,6 with some analyses suggesting there is evidence for a surplus of dentists by 2040.7
Planning for retirement is relevant to clinicians at every stage of their careers. For the majority of older Americans, their biggest financial regret is not beginning to save for retirement early enough.1
Relevant at Every Career Stage
Successfully transitioning into retirement requires planning. Although some studies suggest that planning should begin at least 5 years prior to retiring,8 many believe that retirement is something dentists should start thinking about at the start of their careers. Calculating the amount of money one will actually need is the most crucial and often overlooked step in retirement planning.9 Planning for a successful retirement requires establishing clear goals, committing to a well-structured savings plan, focusing on reaching your goals, and oftentimes, consulting experts for help so that you can reach your objectives as quickly as possible.
Mark Kleive, DDS, a private practitioner in Black Mountain, North Carolina, is about halfway through his dental career. "Most dentists start their careers without much extra cash flow to save, so an individual retirement account (IRA) or a savings incentive match plan for employees (SIMPLE) IRA works great," he says. "When cash flow improves, the option to save larger amounts of money becomes available. In an individual IRA, a person who is less than 50 years old can now contribute $6,000 annually, but in a Safe Harbor IRA, he or she can save nearly 10 times that amount."
The type of retirement planning steps you take may greatly depend on what stage of your career you are in and which options present themselves. "I was out of school for 5 years before I could save a penny. I had too many expenses and spent most of my remaining money on amassing more than 500 hours of continuing education," remembers Robert Margeas, DDS, editor-in-chief of Inside Dentistry. "With that being said, my advice to younger dentists is to start a 401(k) as soon as possible." The guidance of a finance professional can be invaluable in helping you figure out which plans make sense at different stages in your career.
Surviving Fluctuating Conditions
Many dentists who are actively planning to retire in the next 5 to 10 years are members of the baby boomer generation. Since they began working, the world has changed in many ways that affect life in retirement, including a shift from employer-managed pensions to individual-managed 401(k)s, a drastic increase in the cost of healthcare, and several economic recessions that have caused professional and market losses. Many dentists saw a significant decrease in revenue in the years after the 2008 recession.10
Surviving fluctuating economic conditions requires diligence and patience. To mitigate the effects of these fluctuations, talk to a financial planner for help with setting up a well-diversified portfolio.
In addition to developing and sticking to a budget and investment plan, periodically reevaluate your budget to capitalize on any shifts that could allow additional funds to be directed into an existing retirement investment plan. There is also the possibility that investments will not pan out as hoped, but it is always better to know sooner than later so that adjustments can be made. Oftentimes, brokers will charge for the initial valuation, then perform updates annually for a lower, set amount.8 Smart dentists will reevaluate and shift their retirement plans several times throughout the course of their careers to maximize retirement savings.
A recent ADA survey found that dentists will need funds from four different sources in order to retire.11 These expected sources of income in retirement included private savings such as IRA, simplified employee pension, or 401(k) funds (62.4%); social security (13.4%); sale of practice (12.7%); and other (12.5%).
The survey also indicates that dentists expect to live on an average of $127,000 per year when they enter into retirement.11 Having a clear idea of how much you will need in retirement is critical to formulating a successful retirement plan, and understanding the investment plans and tools at your disposal is necessary to optimize that success.
Defined Contribution and Cash Balance Plans
Defined contribution plans, such as a 401(k) or SIMPLE IRA, are small business retirement plans with mandatory employer and optional employee contributions. For the employer, these contributions are tax deductible, and for the employees, the plan is funded with pretax dollars taken directly from their paychecks. With a Roth IRA, the individual does not get deductions when putting money away, but the money in the account is not taxable and is not taxed when withdrawn.
Defined benefit plans, also known as cash balance plans, allow the employer to both contribute and deduct more than other programs.12,13 The effort and costs associated with establishing and maintaining a defined benefit plan are worth considering carefully. An enrolled actuary should be used to determine the funding levels and sign the annually filed Schedule B (ie, Form 1040) included with tax returns. Furthermore, because the employer is guiding the investment decisions of the plan, they assume all the investment risk. "In the event that the retirement plan loses money, the practice has to make it up," warns Bruce Bryen, CPA, CVA, principal consultant at RKG Tax and Business Services, Fort Washington, Pennsylvania. An employer will most likely want to ensure that either a financial advisor or wealth management professional works with them in structuring, rolling out, and administering the plan.8,12
Contribution limits consider how much money is needed to fund an individual's retirement by the time he or she reaches retirement age, based on actuarial assumptions. Utilizing wages, ages, interest rates, mortality rates, and other factors, the plan's actuary will calculate the contribution maximums based upon the number of years that remain until the individual reaches retirement age. In practice, what this means is that older owners will have a higher available contribution deduction than younger owners, because the older owner has less time to accumulate the necessary funds before reaching retirement age.13 Notably, tax regulations do require that plans cover a certain minimum number of employees and that those employees receive a certain minimum benefit in the plan.
HSAs and 529 Plans as Retirement Tools
A health savings account (HSA) is a tax-advantaged medical savings account available to taxpayers who are enrolled in a high-deductible health plan. It can also be thought of as a supplemental investment tool to help improve your financial picture in retirement. A 529 plan is a similar tool, but geared toward future education costs, which may be helpful for people with children. Money is deposited tax-free, and it is not taxed upon withdrawal as long as it is used to pay for education.
Oftentimes, dentists have various sources of savings to draw upon during retirement, such as registered plans, corporate savings, non-registered cash accounts, life insurance cash values, government support, and hard assets. It is important to schedule withdrawals from these various sources to maximize government benefits and minimize tax payments. A financial advisor should formulate a withdrawal plan for the dentist, with the goal of providing a steady stream of income, even during periods of short-term volatility. A defined process should be in place when the dentist retires.8
Meeting with a certified financial planner will force you to inventory all of your financial assets. You may even discover forgotten retirement accounts that could move you closer to your goals.
Key Players in Your Retirement Strategy
Retirement planning requires knowledge of tax laws, compound interest, the present and future values of money, and investment strategies. It is difficult, if not nearly impossible, for a dentist to stay up-to-date with all of this knowledge while simultaneously building a practice, which is why many consult financial experts when it comes to retirement planning.
Unfortunately, only 26% of dentists use a certified financial planner.2 Seeking assistance from a certified and trusted financial professional can help you better understand your options, including saving in ways that offer tax advantages, remaining invested after taking required minimum distributions, and evaluating your practice in preparation for your transition. Although you may find a professional transition service that meets all of your needs, those services often call upon a specialist for nonstandard cases, which is something that you can do too.
"When I'm talking to new clients, I'll explain to them that I need to know everything about them, not only about their business but also their life circumstances, in order to develop the right strategy for them," says Bryen, "This process needs to be very individualized."
Lee Ann Brady, DMD, a private practitioner in Glendale, Arizona, started thinking about her retirement as soon as she started her career. "I work with both an accountant and a financial advisor. I take advantage of both tax-advantaged and other savings vehicles. I have an employer-based plan at my office, which also includes my team as a benefit for them. The process has included HSA plans, disability and life insurance policies, and IRA and 401(k) plans," she says.
John Cranham, DDS, clinical director of The Dawson Academy, started working with an investment advisor just 5 years into his practice. "I knew I was not good at managing money, and I knew I needed to save for retirement, but I had no idea how much," he says. Planning early and effectively is an important component of ending up where you want to be.14 "I just listened and did what the financial services firm said to do. Time, discipline, and sound, conservative advice have worked well. This process also really removed my stress. Once I took care of my retirement savings each year and kept up with my bills, I didn't worry about spending money. It definitely made life more enjoyable," says Cranham.
Selling/Transitioning Your Practice
Knowing the monetary value of one's practice, the tax ramifications, and how the sale or transition will take place are vitally important components of retirement success.
"A dentist's largest asset is likely to be his or her practice. Therefore, it is prudent to know the value of your practice at all points throughout your career. This will enable you to do estate planning; complete a competitive analysis in terms of strengths, weaknesses, and opportunities; prepare a letter of instruction; and maximize revenue opportunities," recommends Keith Drayer, vice president and general manager at Henry Schein Financial Services.
Having a valuation early on allows the dentist to address areas that fall short so that the eventual sale price can be maximized.8 Drayer recommends that dentists begin working with a transition consultant approximately 5 years prior to selling their practice. "They can help identify opportunities to optimize revenue in the last few years and to increase the sale price at the time the dentist decides to sell." A broker would then market the practice until the right buyer is found.
Internal and External Transitions
Whether a dentist chooses an internal or external transition may depend on his or her retirement work plan. If the dentist wants to walk away without any further commitment or responsibility, an external transition may be the most appropriate.
However, if the dentist would like to continue working in some capacity or would simply like to ensure that the practice is in good hands, an internal transition could be the best choice. A dentist may also choose to simply alter his or her work schedule rather than retire early. "I have reduced the types of procedures that I perform, and I do what I enjoy most," says Brady. "One of the gifts of developing financial security is that you have the freedom to make these types of decisions." Similarly, David Burt, DDS, a private practitioner in Allentown, Pennsylvania, has developed a sleep apnea practice within his dental practice. "I want to slow down, but I don't know that I want to retire until, maybe, I physically have to," he says.
"Internal transitions can be complicated," warns Drayer. "The best way to approach them is to set the sale price or formula at the time the associate or family member joins the practice and to get it in writing. Having things in writing will lead to a smoother transition and eliminate ambiguity." An internal transition may also require a significant time commitment in terms of training.
On the other hand, there are benefits to internal transitions. "If there is a qualified associate working for the selling dentist, plans can be made to have that associate acquire the practice in a timely and cost-effective manner. The associate will have the necessary clinical skills and administrative experience, so there will most likely be a smooth transition," says Bryen.15
Taxes and Regulations
One of the biggest challenges of accumulating personal wealth is exposure to taxes. In fact, minimizing taxes is the second most pressing area of financial concern for successful dentists.12
Ongoing changes to the tax laws will affect your retirement plan from start to finish. When selling a practice, taxes must be considered, and only the after-tax amount will be available for spending. A tax accountant can structure the sale of the practice to maximize this after-tax amount, estimate how much will be owed in taxes, and work with a financial planner or advisor to minimize the dentist's tax burden throughout retirement.
Taxes are also an important consideration for short-term financial planning. "The potential for practice owners to lower their current tax bills is often noted as an important benefit to starting a retirement plan. The contribution deduction allowed for owners for their own contributions, as well as for those that they make on behalf of their employees, can often have a significant impact on their tax bills," says Michal Levy, lead director and chief operating officer of the Funds Management Group at AXA US.
The federal government allows individuals aged 50 years and older to save additional, tax-advantaged funds in a retirement savings plan through catch-up contributions. As your retirement age grows closer, it's important to take full advantage of being able to save more money.10
With recent changes in the tax laws, some dentists may be able to write off an additional 20% of their taxable income after all of their deductions and before computing their income tax liability. Income that can be used to claim this 20% deduction is designated as "qualified business income." This type of income comes to the dentist if his or her practice is structured as a partnership. Some of the restrictions and limitations include disqualifying income levels, wage limits, and the inclusion of other income not defined as qualified business income. The complexity of this new change in the tax law is best navigated with a financial professional.
Adapt and Evolve
Retirement planning is an ongoing process. The strategy you adopt should evolve throughout your career and change based on your ability to contribute, your calculated needs, and the tax and regulatory environment within which you are planning. "Start planning as soon as possible. It's all about the time in the market, not timing the market," advises Margeas. The journey to retirement is a long one. The better the financial shape you get in now, the smoother your journey will be going forward.
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4. Health Resources and Services Administration. Health Professional Shortage Areas. U.S. Department of Health and Human Services website. https://bhw.hrsa.gov/shortage-designation/hpsas. Updated October 2016. Accessed September 19, 2018.
5. Munson B, Vujicic M. Supply of Full-Time Equivalent Dentists in the U.S. Expected to Increase Steadily. Health Policy Institute Research Brief. American Dental Association. July 2018. Available from: https://www.ada.org/~/media/ADA/Science%20and%20Research/HPI/Files/HPIBrief_0718_1.pdf?la=en
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7. Bell C. "Survey: Most Americans have financial regrets, particularly about saving." Bankrate Website. https://www.bankrate.com/finance/consumer-index/financial-security-charts-0516.aspx. May 17, 2016. Accessed September 19, 2018.
8. Chen W. Making plants to retire. Dental Abstracts. 2016;61(2):65-66.
9. Pride JR, and Hufford BC. Ready… set… retire. Dental Economics. June 1, 2001. Accessed September 19, 2018.
10. LoPorto S. 6 tips for boomers preparing for retirement. American Dental Academy News Website. March 19, 2018. Accessed September 19, 2018.
11. Black D. Where is your retirement income going to come from? Dental Practice Management Website. http://practicemanagement.dentalproductsreport.com/node/33545?page=0,1 November 30, 2016. Accessed September 19, 2018.
12. McNeely TJ.Retirement planning beyond the 401(k) for the entrepreneurial dentist. Dental Economics Website. https://www.dentaleconomics.com/articles/print/volume-108/issue-3/money/retirement-planning-beyond-the-401-k-for-the-entrepreneurial-dentist.html. March 20, 2018. Accessed September 19, 2018.
13. Kaplan MR. "Tax savings with the hybrid retirement plan of the future--cash balance plans. Northwest Dent. 2014;93(1):37-8
14. DuPont G. Some thoughts on preparing for retirement. Dental Economics Website. https://www.dentaleconomics.com/articles/print/volume-107/issue-11/practice/how-dentists-can-begin-preparing-for-retirement-now.html. November 9, 2017. Accessed September 19, 2018.
15. Bryen B. How to transition your practice to an associate. Dental Practice Management Website. January 31, 2017. Accessed September 19, 2018.