Advice For Dentists Saving For Retirement In Inflationary, High Interest Rate Times

COZINE / STOCK.ADOBE.COM

Tossing and turning is the best that can be accomplished when trying to sleep based on worrying about a dental practice’s retirement plan in this inflationary period.

On top of inflation, there are higher interest rates than have been seen in a decade. The stock market is crashing, and no one seems to have any answers about a strategy that will fix things. There are constant meetings with advisors who are being paid to give answers and a planning approach to resolve the retirement plan issues, but nothing seems to help. Many of the advisors are saying things like “keep working, keep the money invested in cash and wait.”

Unfortunately, these are not ideas that will bring the retirement plan back to being sound financially or merely stable. One thing that some of the advisors are offering as advice is to not panic. That is a tough bit of advice to follow and doesn’t really do anything except to calm the dentist’s emotions if that is possible.

The following approaches can create some ideas that may offer hope or at least a chance to have some hope:

If the dental practice has a defined contribution plan where the payments are based upon the statutes and you can’t contribute any more than the statutes allow, make sure that you are paying in and deducting the highest amounts that you are permitted to do. Even though this does not fix the accumulated problem, it at least gives some tax advantage to the practice and the dentist. Remember that because the stock market is performing so poorly, the purchase price of the current shares being acquired are on the low side. Take advantage of the stock market and buy now as the market is at a discount.

Make sure that your portfolio is diversified. If you are invested materially in a single or just a few sectors of the market and don’t feel like selling and taking a huge loss, use the new money contributed to the retirement plan for diversification. You can leave the funds invested in cash while it is in the retirement vehicle, and you don’t have to invest in anything until your advisors think the time is right. Part of the diversifying may be to start buying into the bond market knowing that as long as you are not trading and you are holding onto the bonds until their maturity date, you are protecting the principal, even though your rate of return may not be high. This strategy has an investment return, though small and it’s safe as long as it’s there. When the market changes on the upward approach, the new money can go back into the stock market if you desire.

The dental practice is still earning a lot and the taxes are high. Is there a strategy for this type of situation?

If the dental practice is doing well financially, it may want to begin contributing more to it rather than sitting and waiting with the defined contribution plan such as a 401k or Simple IRA. Once the practice is out of the controls of the government statutes where the contribution is limited based on age and other factors, it may want to think of increasing the type of retirement plan design with higher contribution levels such as a defined benefit plan.

These plans require a specific design based on what the owners of the practice decide upon what they want when retirement comes. When you compare the maximum deductible amount that can be contributed to a defined contribution plan to a defined benefit plan, the speed at which the retirement plan can overcome its losses and the current poor performance of the past can be assessed.

In 2023, the maximum contribution that can be made to the defined contribution plan is $73,500 for those 50 years old or older and $67,000 for those not yet 50 years old. The defined benefit plan has a limit based on age, compensation, and the normal retirement age of over $200,000. If 50 years old or older, there is a higher deduction allowed of the difference between $73,000 and $200,000, or $127,000. Think of how fast the loss in the retirement plan can be overcome with an extra $127,000 going into it each year? The dentist must have a constant source of dental practice income that is on the high side to be able to afford the defined benefit contributions. It is possible to use personal money for the investment into the defined benefit plan as well as the defined contribution plan assuming that the dentist has accumulated enough personally into his or her own investments.

What is the dentist supposed to do?

The concept for the dentist is to do something and it may mean thinking outside of the box and investing in stocks, bonds or other types of investments that will assist in overcoming the retirement plan losses. It may mean that the dentist should add another type of retirement plan to his or her dental practice responsibilities so that the annual contributions become higher each year. It is important to meet with financial advisors and sometimes the dentist has to be the one who is the lead in getting the advisor to be less conservative in his or her approach to investing. For those who are not yet age 50, losses can be overcome by working longer and the risks are less for the younger dentist compared to the older dentist based on the age of each and the amount of time each has left before retirement or the sale of the dental practice. If nothing is done, the dental practice retirement plan will remain stagnated and won’t recover the past losses in enough time for the owner to actually see the results. Contribute the maximum each year and the retirement plan will be in better condition no matter what happens.