When I talk to dentists about achieving their financial goals, they initially fall into one of three groups.
* The first is: “I’m all set. I’ve coordinated my financial affairs and I’m growing my net worth according to my written financial plan.”
* Another is: “I’m too busy growing my practice to worry about it right now.”
* Some just wave their hands and say: “I enjoy my practice. I make enough money to do what I want. If I ever want to retire I can sell my practice faster than you can say temporomandibular joint.”
First let’s focus on why the doctors in the third group may be disappointed. As a successful general dentist, you understand the importance of keeping your practice’s collections high and overhead low. According to Dr. Charles Blair, nationally known dental consultant from North Carolina, general dentists historically have been able to maintain overhead at about 62%. This means that the owner’s discretionary income is about 38% of collections.
For example, a general dentistry practice that averages collections of $660,000 per year will allow the doctor a discretionary annual income of $250,000. This revenue may be reinvested into the practice or used to compensate the owner with pay and benefits.
Second, you are likely to maintain your current standard of living during retirement. In my experience working with recent retirees, it is safe to assume you will continue to spend 80% of your income, the same as what you spent while working. So if your pre-retiree income is $250,000, you are likely to need $200,000 per year to maintain your standard of living.
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From a cash flow point of view, you may need all of your current income. This is because, as a business owner, many lifestyle expenses come from your pre-tax income. For example, if you retire before age 65, health insurance will need to be added back into your expected expenses in retirement. As a retiree, all of your travel will now be paid with after-tax dollars, regardless of the educational benefits of the trip.
Third, the valuation of a general dentistry practice is as much art as science. The valuation methodology, the valuation date, and the purpose of the valuation generally determine the price. From a retirement planning point of view, a general dentistry practice can be assumed to sell for a multiple of the collections. This means that the dental practice may sell for a fraction of annual revenue. This multiple varies with market forces (i.e., supply and demand). According to Leigh Anne Bowling, a dental transitions attorney in Virginia Beach, a general dentistry practice may broker in a range of 55% to 95% of collections. In this example, assume that the practice sells for $500,000. This is about 75% of the $660,000 the example practice collects annually.
Fourth, let’s look at the “standard of care” for retirement planning. Once retired, your liquid assets will need to sustain you and your family for decades; a 4% to 6% maximum initial withdrawal rate is required to have a good likelihood of not running out of money during retirement. At a 5% withdrawal rate, every $50,000 of current purchasing power requires at least $1,000,000 of investible net worth. As you know, $200,000 is 5% of $4 million. So, in order to maintain your retirement lifestyle, you’ll need to start retirement with investible assets of $4 million.
By investing exclusively in your practice, you may never be able to retire. This is because the sale proceeds of our example practice at retirement might generate one eighth of the cash required to maintain the doctor’s lifestyle during retirement.
As a Certified Financial Planner, time is my biggest ally in helping doctors succeed. You are always going to be busy. Without early and detailed planning, you may never get around to being set financially. By starting now, you’ll have a clear understanding of what is possible and what isn’t. A financial plan that is coordinated with your business plan is like a road map, a tool that can help you get where you want to be.
You didn’t get where you are today by accident. There is a better way than figuring things out as you go along and hoping that somehow everything will work out.
Jake Jacklich is a registered representative of Lincoln Financial Advisors Corp. Securities and investment advisory services offered through Lincoln Financial Advisors Corp., a broker/dealer (member SIPC) and registered investment advisor. Contact him at [email protected] or 757-374-6979. CRN201305-2080448
