By Connie M. Tyson, CFP, CLU, RHU, LUTCF
How do you define financial success? What would make you confident that you are maximizing investment opportunities?
Dentists are not taught much in school about running businesses. A dental school dean told me that there is not enough time in curriculums to fit everything students need to know. As a result, you dentists are on your own.
If you buy a practice, you might inherit the seller’s retirement plan and the fiduciary responsibility for it. The staff is used to the plan, so you might keep it.
You likely had to obtain life and disability insurance for your practice loan. Malpractice insurance and property-casualty insurance were a package you completed before you took over the practice.
What about investments, though? How do you develop some investment savvy and put your hard-earned money to work for yourself?
Money for yourself
For many dentists, it takes two or three years in practice before the edge comes off financially. After that, you’re not green around the gills regarding debt from school loans, practice purchases, and maybe home purchases. A steady income resulting from a steady stream of patients quiets some of that financial fear. Your income-to-debt ratio is manageable.
Planning for couples
Perhaps your spouse brings in a second income. You have discretionary income and likely dress, drive, and eat better than you did as a student living on Top Ramen. You want to invest for your future. Some of you already have children and wish to provide for their college educations (and possibly dental school). Where do you begin? A financial planner can help you map and define your dreams by way of the following questions:
- What age?
- How much annual income?
- How long will we both live?
- State or private school?
- Bachelor’s degree or further?
- Do you own a home now?
- Trading up, second property, or dental building?
- Do you have expensive activities?
- Purchase your dental building?
- Emergency fund (three to six months of income)?
- Investment portfolio?
- Trip fund or tax fund?
You might make more than your spouse. Remember, you are a financial team working for common goals; the numbers are just different. You each can start saving a modest amount per month, say $250. In a few months, you can review this and raise the savings to $350 a month, and so on. Give yourselves raises.
Retirement plans get paid first. They are “qualified” plans, meaning they qualify to grow tax deferred - no taxation on your profit (gain), until you take it out in retirement. You contribute to the plan you established at the practice (SEP, 401(k), Safe Harbor 401(k), profit share, 412(i)). Your spouse likely has a 401(k) at work that he or she can contribute to as well. Plan to put away the maximum you both possibly can in a year. This pay-yourself-first philosophy lets you use the time value of money compounding over many years and is tax-deductible.
Emergency funds get set up second. You and your spouse don’t know what emergency or opportunity might occur when you’ll need money quickly. Your spouse could lose a job, you could have an accident or fall ill and be unable to practice, the car could break down, or a child, parent, or other family member could need your help. Or positively, that little beach cabin your folks rented every summer when you were a little girl just came up at an estate sale. These unforeseen events are the purpose of an emergency fund.
If you have money left, the remainder of your monthly investment will go into a “nonqualified” (not tax-deferred) investment account. A good place to start is in mutual funds with an asset allocation (mixture of different types of mutual funds) on the high side of moderate. You want growth, so place maybe 70 percent in stock mutual funds. You also want income from dividend-producing bonds, so place some 30 percent in bond mutual funds. Asset allocation represents 95 percent of a portfolio’s variation in returns and can help reduce the risk of one asset class.
Do some homework and be creative. Or, a financial advisor can help you sort it all out on fund selection based on his or her research and recommendations.
What if I’m single?
If you are single, your investment emergency fund is first priority before your retirement fund. Make sure you are fully insured for personal disability insurance, which pays your income if you are sick or hurt and can’t see patients. Your income will come to an abrupt halt if this happens. The insurance carrier will provide necessary paychecks to you from your policy until you are well and practicing again. Fund selection for asset allocation is your decision alone or with a planner.
Is a house or dental building a good investment?
Well, a house is the American dream. The financial reality is that a house is the largest investment most people make. For many, it becomes their most profitable investment. For some, it becomes a financial and emotional disaster.
First-time homebuyers might ask, “Is now a good time to buy?” or, “What size down payment should I make, large or small?” If you own a home, would trading up be a good investment or is downsizing a smart move?
The same applies to your dental building. Do you have rights of first refusal on your building? Because location is important, is it the correct location for your patients and practice? Is it accessible by bus lines and for the handicapped and equipped with parking and elevators?
To best answer whether a house or dental building is a good investment, think of it as we think of stocks and apply the same intrinsic-value principles. When we consider buying stock, the proper question is not whether it is a good company, but whether the stock is cheap or expensive. Is it worth what it costs (cost effective)? When we consider buying a house or dental building, we should ask the same question - not whether it is a good house or building, but is it cheap or expensive? Is it worth what it costs?
The intrinsic value of a stock depends on the company’s cash flow. The same is true of a house or building, and one of the financial benefits of owning is that you don’t have to pay rent to a landlord. It also has tax implications that help offset your higher income.
The nontraditional family
A generation fed with images of the ideal American family on TV shows such as “Leave It To Beaver” and “The Adventures of Ozzie and Harriet” has turned the ideal image of a married mother and father raising their biological children into somewhat of a cliché.
Unmarried couples, single parents raising children, and lesbian couples have different legal and financial rights than do married, heterosexual couples by law. These can vary from living arrangements to income tax issues, estate tax issues, to something as simple as the right to visit your partner in the hospital and be consulted about his or her care.
Building structure that will join lives financially takes careful planning. It is important, for instance, to make sure that an investment is registered correctly or property is titled correctly. That is much more important than choosing the right investment.
Divorce: 10 steps forward, three steps back
Divorce can have negative emotional and financial impact. It happens as much in the dental field as elsewhere, and it could happen to you. You can’t plan in fear of it; you must move forward and continue investing if you are going to reach your financial goals. You need time in your favor for compounding growth to work.
If it happens, step outside the emotion of the financial split and pragmatically get back on track. Alter your priorities to emergency fund as first priority, disability insurance as second priority, then your other asset goals.
John D. Rockefeller was once asked by a reporter, “How much money does it take to retire?” Rockefeller answered, “Always more than you have.” This is from the richest man of his time.The answer actually hinges on several factors:
- Age you want to retire
- Where you want to live during retirement
- Current income needs
- Whether you will travel
- How long you will live
- Lifestyle during retirement
These questions begin the process of painting retirement as an economic destination. The question should be posed, “How do you visualize your life when you are in your 60s, 70s, and 80s?”
Retirement isn’t an event. It is a stage of life that will have many changes, opportunities, and challenges. Some of you will retire in your early 60s, and others will enjoy practicing longer. If your health is intact, you should. Financial planners can determine how much you will need in dollars for the type of retirement you desire. Alan Greenspan, at the 2004 National Summit on Retirement Savings, is quoted as saying, “One of the most complex economic calculations that most people will ever undertake is, without a doubt, deciding how much to save for retirement.”
The discipline of investing, along with your money making money and you making money, will pay off. Focus on life’s events, and your investments will deliver results and make you more confident that you are maximizing your investment opportunities.