What You Don’t Know Will Hurt You!
by Jake Jacklich, CFP®
Are you on track? From a financial planning perspective, the answer is complex and depends on a lot of variables. One of the most important is your individual exit strategy from dentistry. Dental practice transition consultants typically advise that it’s never too early to begin planning your exit. Still, few doctors consider their exit strategy until they are ready to retire. In my opinion, this is a mistake, regardless of the current stage of your professional career.
Although counterintuitive, it’s vital that you consider how you’d like to leave dentistry. Here’s why — in my opinion, you can’t possibly be saving the correct amount to retire comfortably if you don’t know how or when you will leave your dental practice!
According to Bill Bengen’s 1994 "Journal of Financial Planning" article on safe withdrawal rates, you’ll need about $1,000,000 for every $40,000 of purchasing power during retirement. Suppose that the average dentist has a standard of living of $160,000 per year. This dentist would need around $4,000,000 to maintain that standard of living without practicing dentistry. (This is a hypothetical example for illustrative purposes only; your personal situation will vary). Consider that most dentists today practice in one of the following situations:
The employee associate dentist who won’t be an owner. Since these dentists will not have a business to transition from, they should be saving the most today.
Dentists in either an individual or group practice. The majority of dentists practicing today fall into this category.
The self-employed practitioner generally chooses one of three paths:
1. The default and most common scenario — work until you are old and tired. Then, walk (or be carried) away. This doctor’s retirement transition usually consists of a hasty sale of the practice’s assets and building. From a financial planning standpoint, this dentist is rarely better off than his or her career associate employees.
2. Deliberately transition from a mature and profitable business. This is slightly better from a financial planning perspective. The sale of the going concern and the doctor’s building can result in a large sum of cash upon retirement. Of course, practice brokerage fees and taxes must be paid, so the retiring doctor is often surprised at how little money ends up in the bank. Because of the “big check at the end,” this doctor can achieve the same retirement goals as the associate employee with a smaller-level monthly saving requirement.
3. The group dental practice model. This is best mathematically, and strongly encouraged by national financial planning/practice transition/accounting firms. The benefit is that the senior doctors get an associate to “buy in” years before they actually retire. Therefore, the practice owners can structure the deal so that the sale proceeds are directed to the practice’s pension plan. This strategy is optimal because of the tax-efficient potential to rapidly grow wealth and significantly lower the level of monthly savings needed to achieve the same retirement goal. The catch is that you’ve got to have both the entrepreneurial drive to be a business owner and the temperament to resolve complicated business issues with your partners. (This is kind of like suggesting that you could save money by riding the bus to work each day — true, but you would have to ride the bus to work each day!)
Doctors with identical incomes and goals can need completely different advice to achieve their “net worth number” upon retirement. You’ve got to have a good understanding of your career path before you can determine how much to put in your 401(k) this month.
Jake Jacklich is a certified financial planner and financial advisor with Waddell & Reed in Virginia Beach, Va. He works primarily with self-employed dentists to help them better understand their money. His core competencies include financial planning, analysis of the doctor’s current financial position, dental practice valuation, tax-sensitive wealth accumulation and distribution strategy, risk management, investment strategies, practice transition, and retirement planning. He is securities licensed in Arkansas, Virginia, and Wisconsin. Contact him by phone at (757) 374-6979, by email at email@example.com, or visit his website at www.JakeJacklich.wrfa.com.
Editor's Note: The opinions expressed in this article are meant to be general in nature and should not be construed as investment or financial advice related to your personal situation. Please consult your financial advisor prior to making financial decisions.