The Dental Retirement Runway

The Dental Retirement Runway | Image Credit: © kunakorn - stock.adobe.com

How much is enough, now? And how much is enough, later?

When it comes to retirement planning and what you’ll need when you set down your dental handpiece for the final time and welcome a patient into the operatory for the last time, there is no magic formula or milestone dollar amount that needs to be in your nest egg.

Every clinician’s situation is unique. How many children and grandchildren you have can play a role. Whether you’re single, married, divorced, or widowed plays a role. Your lifestyle goals for now and in the future can be vastly different from those of your colleagues and will certainly affect what is needed and wanted.

How long you desire to, or are even able to, continue with your dental practicing career will also have a big impact on your retirement plans.

However, we all know the importance of starting a retirement runway and we all know that it’s better to take care of it sooner rather than later.

Dental certified public accountants (CPAs) and industry experts Doug Fettig and Bruce Bryen have plenty of experience helping clinicians plan for their financial futures. Not surprisingly, they both stress the importance of having a trusted financial expert—preferably a dental CPA—offering advice and recommendations to ensure you can get the most out of your golden years.

“The way that a dentist maximizes their success, creates a sustainable work/life balance, and brings joy into their practice is by following a simple principle. Do what you love, what you are passionate about, and/or what creates the most value–and outsource EVERYTHING else,” says Fettig, CPA, MBA, a dental business speaker and leadership coach.

This is achieved, says Fettig, by bringing in industry experts to help clinicians run their business. Dentists are small business owners, and as the CEO of their business they can’t afford to hire a chief financial officer, a vice president of marketing, a chief technology officer, etc, he explains.

“The way to bring these skill sets into your business is by outsourcing these areas to industry experts. This includes bringing in an industry CPA to handle your tax planning and accounting needs. A dental-specific CPA understands the nuances of running a dental practice, including common tax incentives,” Fettig says.

In addition, a CPA who works with other dentists has benchmarks in place that you should be achieving related to cost and expense ratios. These specialists, for example, can compare your expenses with others’ and provide direct and immediate feedback in areas where your cost structure appears to be out of expected ranges.

“By having a deep understanding of your industry, a dental CPA will help make your practice more profitable and your life more enjoyable,” Fettig concludes.

Bryen, CPA, CVA, concurs. A CPA with over 45 years of experience and who is a part of Baratz & Associates CPAs, he adds that most general-business CPAs are not attuned to critical dental areas such as goodwill.

“A dentist should work with a dental CPA since a CPA who does not specialize in working with dentists will not understand how the differences in accounting for dentists or evaluating dental practices compares with general businesses such as those with an inventory,” says Bryen, also a regular columnist for Dentist’s Money Digest. “Evaluating goodwill is one of the most valuable assets in a dental practice, where a general business may have little or no goodwill value. In dentistry the goodwill can represent 50% or more of the value of the business.”

How/When to Plan for Retirement
Now that we’ve agreed that dentists should be working with a dental CPA and/or a trusted financial adviser, when should they start putting money aside? And how much?

Again, this will vary depending on the clinician’s specific goals and situations. That said, you can’t start planning for your future too soon, and something is always better than nothing when it comes to amounts.

“A younger dentist’s main strategy for retirement should be ensuring that they are able to begin investing for retirement early in their career—ideally when they receive their first paycheck,” Fettig suggests. “The power of time and compound returns practically ensure that a dentist who begins saving/investing for retirement at a young age will find themselves in a solid financial position as they near retirement.”

Don’t let your debt or your interest rate concerns prevent you from putting that retirement money aside. The sooner your retirement funds are in place, the more opportunities they will have to grow.

“The young dentist needs to start investing for retirement regardless of how much debt they have, or what the interest rate is on that debt. If they wait until they are debt-free before they begin saving/investing, they will have lost out on years of compound returns—time that they can never get back,” Fettig says. “A young investor is far better off putting money into a retirement plan than making extra payments on their debt.”

Fettig adds this as an example: If a dentist can invest $2,000 per month starting at age 30 and continues investing that amount until they are 60, they will accrue (at an average annual return of 8%) almost $3 million. If they wait until the age of 40 start making those retirement contributions, they will have amassed only about $1.2M—a substantial difference of $1.8M.

Obviously, a younger dentist has many more years to prepare for retirement compared with an older dentist. Waiting to adopt an employer-sponsored qualified retirement plan is easy and inexpensive for a younger dentist, Bryen explains. For an older dentist who wants to have a reasonable amount at retirement, a much more comprehensive and expensive type of retirement plan is needed. This will ensure that enough is put into the plan as quickly as possible so that there is something to withdraw at retirement that is significant. So, again, the sooner the better.

A clinician who is nearing retirement has hopefully been saving and investing for years and is now in the process of planning their eventual practice sale. In order to maximize the value of their practice, it’s imperative that they begin the process of prepping their practice 3 to 5 years prior to the sale, Fettig states.

“A dentist nearing retirement may also consider whether they want to alter the risk profile of their investments, depending on their risk tolerance and how close they are to being on track to meet their retirement goals,” Fettig adds. “If a dentist [who] is nearing the end of their career has the ‘first world problem’ of significant income, they can also look to set up a defined benefit (cash balance) retirement plan, which would allow them to invest hundreds of thousands of dollars into a retirement plan as they near retirement.”

The Impact of DSOs
Dental Service Organizations (DSOs) are on the rise, and their prominence is influencing young dentists starting out as well as established practices looking to sell and open retirement opportunities for the clinicians/owners.

More potential buyers are always a good thing. Just make sure to do your homework and make sure you get what you deserve, Bryen says.

“The option of having a DSO available to sell the practice to and to phase out of working is a good fit as long as the dentist receives enough compensation at the closing,” Bryen states. “The DSOs expect the dentist to work for a while after the practice has been transferred to it. This allows the retiring dentist to slow down and to expect a little more money in the future from his or her buyout.”

Looking to sell to a DSO is a scenario that a dentist, in collaboration with their financial planner, can incorporate into their retirement plan and timeline, Fettig says.

“Selling to a DSO provides the dentist with a near-term financial windfall, as the DSO will normally provide an up-front payment to the dentist. The dentist is then required to work 3 to 5 years to earn the remaining portion of the agreed-upon practice value. The dentist needs to decide if selling to a DSO and becoming an employee for the final few years of their career is the best option for them,” Fettig says.

Conversely, a dentist can look to add an associate or a partner to their practice, with the goal of eventually selling the practice to their colleague. In this scenario, the selling dentist must ensure that they plan this approach out well in advance, as there is no guarantee that an associate will be a good fit with their practice and their team.

“However, if the dentist is able to find an associate who is a great fit for their culture and wants to purchase their practice, this can be a financially attractive option,” Fettig adds. “In order to maximize the value of the practice, the selling doctor will often stay on for a period of time after the sale to help transition the patients and the team to the purchasing doctor.”

Regardless of the approach that a dentist takes, the financial windfall from the sale of their practice should be looked upon as “icing on the cake” of their retirement plan. If the clinician has been consistently investing for retirement over the course of their career, the proceeds from the sale should be dwarfed by what they have already accumulated over the course of their career, Fettig summarizes.

Sage Advice
Clinicians should work with a financial adviser to ensure that they have a well-laid-out retirement plan. The dentist should feel comfortable that the retirement plan they are executing will enable them to live the type of life in retirement that they had envisioned, Fettig says, adding that this involves disciplined investing.

“They should also be aware of the emotional component of retirement. By that I mean that people thrive when they feel that they have a purpose in life—a reason to get out of bed,” Fettig says. “When a dentist (or anyone for that matter) decides to retire from their profession, they should think about this: ‘It’s not what I am retiring from, it’s what I’m retiring to.’ In other words, what will give you emotional purpose and passion once you leave the dental office?”

Bryen adds that clinicians who surround themselves with a strong support group have a better chance to thrive both while practicing and when it comes to preparing for retirement.

“A dentist should surround himself with professionals who are experienced in working with the dental profession,” he says. “A dental CPA, financial planner, and a good marketing person are important for planning. Steady practice revenue growth is important. Attendance at seminars so the dentist continues to learn new skills and sharpen existing ones. Adding an associate to the practice to help the practice grow and to plan for an exit strategy [is also a benefit].”

After a career of helping others, dentists have earned the right to enjoy their post practicing days. With some good planning, their retirement runway can lead down a long, satisfying path.