As a dentist, you have been planning your entire life. You planned to attend college, planned to attend dental school, planned to have your own office, and planned to retire someday. Unfortunately, many dentists fail to plan their finances for retirement. If you are planning to retire in the next ten to fifteen years, now is the time to plan your retirement finances.
Note: The two most common reasons dentists retire are: (1) disability due to age or injury, and (2) the desire to spend their time elsewhere. If you are retiring for either reason, you have to have your finances in order. Below is a brief outline to ensure you are able to retire when you choose to do so.
1. Confirm that you have enough disability insurance (own occupation), in case a disability occurs.
Pay for your disability insurance with your personal funds so you are not taxed on this income if you become disabled.
2. What does it cost you to live?
If you cannot answer that question, it is time to start calculating. Use your credit card statements and checking account register. Include taxes, health insurance and medications, travel, the prorated cost of a new vehicle every ten years, gas, insurance and repairs, house repairs and maintenance, clothes, gifts, entertainment, hobbies, food, utilities, and cable. Determine a monthly and yearly “cost of living.”
3. What do you owe?
Now is the time to get totally out of debt. Banks place liens on your practice when you borrow money or open a business line of credit. If you have borrowed money, this debt will be will have to be paid off before or at the sale of your practice. Make becoming debt free a priority long before you retire.
4. Do you have any impending large liabilities?
These can include things such as a daughter’s wedding, college tutition payments for children, and the mortgage on your home.Put money aside for these liabilities instead of borrowing and incurring more debt. Make sure you also have a cash emergency fund that will sustain you for two months. This financial step may mean a change in your current life style, but better late than never.
5. What do you own?
Do you own stocks, bonds, fixed assets, cash, or money market accounts? Will these assets provide enough income after retirement? Although social security is currently viable, it will only fund a very small portion of your retirement.
6. There are two ways to plan for retirement funding.
You may choose to live off of just the income of your investments and leave the principle intact, or choose is to use up the principle and hope that you take your last breath on the day you spend your last penny. The method you choose will help determine how much money you need for retirement
If your future total income from investments, social security, disability insurance, and other sources will not sustain your future budget, then you have to either reduce your current and future standard of living or lengthen your time line for retirement.
Some dentists think that the answer to retirement income is to sell their practice. However, very few practice sales produce enough income to sustain you through retirement. After taxes and closing expenses, the profit from selling your practice (not including real estate), is roughly equivalent to what you would take home from the practice after working an additional 18 to 24 months.
If you have your finances in order and can retire without worrying about your income, then the last step of planning before you contact a broker to sell your practice is to plan your life, hobbies, and trips you will take after retirement. Remember, “If you fail to plan, you plan to fail.”
Gretchen Ohlmeyer Lovelace, MS, CFP, CPM, is the president and founder of Lovelace and Associates Inc., a practice transition firm endorsed by the LDA. She has 35 years practice management experience and has been evaluating and transitioning dental practices since 1990. She presented courses on practice transitions at the 2013 and 2015 ADA national session, and also speaks to other national, state, and local dental meetings. She is a member of The Financial Planning Association, the Institute of Business Appraisers, is a licensed realtor and notary in LA, and is past national president of ADS Transitions. She can be reached at [email protected] or (225) 927-8015.