How the changing economy is affecting dental professionals’ retirement planning.
The economy is cyclical. That is, while it may not be so great now, it won’t always be crummy. Conversely, when the economy is doing well, it’s not a bad idea to sleep with one eye open.
But the economy doesn’t just affect dentists’ bottom lines; retirement savings are impacted. The past year has had an unfortunate shock on everyone’s retirement planning efforts. Can dentists recoup? Are there ways to head off trouble the next time the economy takes a dip?
The answer, of course, is yes.
The person who sees the glass as half-full can look at the pandemic and still find the silver lining, and despite the global health crisis, it turned out to be good news for dentists’ pocketbooks. Regrettably, that boon was bound to end.
“The pandemic actually turned out to be good for dentistry until the end of 2021,” Roger Levin, DDS, observes. Dr. Levin is CEO and Chairman of dental practice consulting firm the Levin Group in Owings Mills, Maryland. “Many practices had record years in 2021. There was huge, pent-up demand. They were busy, and therefore retirement savings were on track as usual, or maybe a little bit better in ’20 and ’21. But 2022 was not a pandemic effect, it was an economy effect. The economy slowed down. There were higher no-shows, higher cancellations, less case acceptance.”
The economy’s impact trickled into retirement savings, and it seemed to start with the stock market.
“A lot of the high-tech companies have always shown much higher value than what their income would project,” Bruce Bryen, CPA, CVA, says. Bryen is a part of Baratz & Colleagues CPAs and an expert in the accounting practices for dental and healthcare offices. “In the old days, what would happen is that we would look at an income statement and the income statement would give you an earnings factor, and people would say, ‘Well, in this kind of industry, the multiple might be 3 times EBITDA (earnings before interest, taxes, depreciation, and amortization) or 4 times or, or 1 times.’ But because of the inflationary effects, the market has dropped so much. A lot of advisors are recommending that people buy into the bond market, especially those that are older–it doesn’t give you the upside that the stock market gives you, but it gives you the protection.”
“We’re seeing a lot of practices in 2022 that are down in production, and therefore down in profit, and therefore retirement contributions may be lower,” Dr Levin adds. “And I would say that that can be anywhere from 10 to 15 percent. The other factor is the investing of retirement savings. The statistics I’ve seen from economists are that 401(k)s are down by about 20 percent from where they were.”
Bonds are, conventionally, a safe investment, but even those safe bets were affected.
“Even the bond market has been hit hard because of inflation,” Bryen notes. “And that’s the kind of thing that people are so worried about. That this is hurting all sectors of the marketplace, stocks and bonds. So, you take a company like Tesla and the value of that company now has dropped substantially over the last couple months. But it’s still so high that a buyer, as an example, looking at earnings isn’t going to get the multiple from the earnings to be able to say, ‘Well, if I borrow a million dollars, what’s my return to be able to pay off my debt and to have a profit?’ And that’s not working because of inflation. Because the rates to borrow are getting so high that it’s hard to do that anymore. And most of these investments now are the big hedge funds. I’m not talking about individual people, but where the big money is coming from to the investment in these companies. So, they’re looking at hedge funds, venture capital, because they’ve got much less debt and much more capital to invest to protect themselves against the inflation for the future. So, it’s just been a really, really tough year for the market. Inflation is causing an awful lot of it, and inflation is causing interest rates to go up in housing markets, stock values are down. And it’s all coming from inflation.”
It’s hard to put a dollar amount or a percentage value as to how much retirement savings were negatively impacted. The simple answer seems to be, “It depends”. Younger dentists, says Bryen, have a better chance of rebounding simply by virtue of the fact that they have more time for damage control.
“It varies based on the type of retirement plan that dentist has,” Bryen says. “For instance, a 401(k) or a simple plan where you’re putting money away, you hope the values go up, but if the values go down, you are continuing to put money away, and the younger dentist has the opportunity to recover. The older dentist doesn’t have the amount of time that the younger dentist has. Some of the older dentists–I’m talking 50, even though to me that’s not old, but that’s the guideline the Internal Revenue Service uses for being older–and having the ability to use a Defined Benefit Plan rather than a Defined Contribution. The Defined Contribution is to 401(k). They’ve all suffered. All the types of plans have suffered–some up to 50 percent–and people are extending retirement dates, they’re extending dates that they would be selling their practice, because they want to try to get the retirement plan back into decent shape before they would sell or retire.
“And so, they’re working longer, they’re trying to overcome the problem,” he continues. “But a 50 percent drop is not unusual in today’s times with inflation. Some of the people are going right into the bond market, but even those in the bond market have suffered. Their values have dropped, but at least they’re stable to hold on, not trade. If you’re holding onto your bond, if it’s a 5-year bond, 10-year bond, and you hold onto it and you’re not trading, then you won’t have the problem. You would get back your principal and you get a minor rate of interest return. But you’re whole when the bond finally matures and you get your principal, you’re in a lot better position than those who are going for the stock markets and trying to increase their value that way, which has been a really good ride.”
A challenging economy has caused some dentists to reevaluate how they invest.
“A lot of people were just saying, ‘Well, this is going to continue. Even if it’s not as great, it’s still going to continue’,” Bryen says. “Well, those people are the ones who have suffered 50 percent, sometimes more. And those that are younger, they’ve got more of an opportunity to come back. They see what’s happened and they start to change their investment strategy, and they do get more involved with bonds–what they call fixed income–and they hold rather than trade the bonds. And that’s the key for the young dentist, not to think that everything’s going to continue to be really good like it had been for the last 10 years, but to hedge their bets and go into something where they’re more involved with the principals, like a bond.”
But there’s only so much hand-wringing that anyone can do over lost retirement savings. At some point, it’s time to roll up one’s sleeves and try to recoup. But is recovery even possible?
“Well, it’s going to be a little more difficult, and here’s why,” Dr Levin observes. “Retirement saving contribution is based on income. So, many practices equate profit and income, but The Levin Group data is showing that staffing costs are up by 10 to 12 percent. Now, staffing typically makes up around 25 to 30 percent of practice expense. If they rise 10 to 12 percent, then that represents an increase in overall practice expenses. We believe that staffing alone will increase total overhead by 2 to 4 percent, which means that we also believe that with inflation, practice expenses with overhead will rise between 5 and 8 percent of total overhead. But then, when you add in inflation on supplies, materials and other expenses, insurance, cyber insurance, for example, we’re looking at a 5 to 8 percent total overhead increase. That means if the practice does not grow, then the retirement contribution will be lower because the doctor’s income will be lower.”
“The younger dentist has an easier chance to recoup, because the younger dentist has more time,” Bryen adds. “The older dentist can do it, but the older dentist has to change their approach, because–for instance–if the older dentist was involved with 401(k), because of the statutes, the law, you’re not allowed to put away more than a certain amount each year. So, the older dentist has to think, ‘Well, I’ve got to put more away faster to be able to catch up for the losses that I’ve had and change my investment strategy to overcome the inflation that’s hurting so much’. So, the older dentist may have an advisor who suggests this Defined Benefit Plan–sometimes called a Cash Balance Plan–where the amount of money that is invested is allowed to be higher each year because it’s based on a formula. For instance, if a dentist is 50 and if what they call the normal retirement age is 65, that dentist has 15 years to put away an amount of money that’s going to get him or her caught up with what their losses have been. If an older dentist is 60 and the normal retirement age is 65, then that dentist only has 5 years to put away enough to get caught up with the losses that he or she had. So that dentist and that dentist’s advisors may say, ‘Well, if you can afford it, you should be thinking about a Defined Benefit Plan, because we create a formula and the formula says you’ve got to put away $150,000 a year for the next 5 years, where in the 401(k) it’s in the low fifties [$50,000 ranges] that you can put away each year’. So, you can triple the amount of your contribution, or even more, so you can get caught up for the losses that you’ve had, and just watch that new money that’s going in there. Just be really careful with it, so it doesn’t get hurt by any inflationary factors. Some people are afraid to do that because they don’t know if they could afford to put away the $150,000 or $200,000 a year, but it is a way for them to get caught up–and pretty quickly.”
Bonds may be a safer bet, but the return on investment won’t come quickly.
“The problem with the bond is that you might get antsy as the stock market starts to rebound,” Bryen says. “If inflation cools off a little bit and you start to see the stocks going up again, well, the value of the bond is almost always the opposite of the stock market. But if the stock market keeps going down and the bond market starts going up, then the dentist may look at the bond investment and say, ‘Wow, I bought the bond. The par is a hundred dollars. I’m getting one and a half percent interest. That stinks.’ But the par is the same, the value is the same. If I just keep it and I don’t get antsy to try to treat it like it was a stock. So, if you’ve got a 10-year bond, 20-year bond, or 5-year bond, and you hold it and you collect your interest, even though it’s a very, very low amount of interest, and you see things starting to move up and you might want to trade it, that’s when you’ve got to really be disciplined, and you don’t trade it. You just say, ‘Well, you know what? This is due in 5 years. I’m going to get all my money back if the market really goes bad again, I’m not going to lose anything. I may make one and a half percent instead of 10 percent, but I’m going to get it all back, rather than losing half of it, like the way the market is right now.”
Heed the Warnings
It’s easy to look in the rearview mirror, and say, “Well, here’s where the economy went off the rails”. But, going forward, should we be looking for anything to mitigate future financial disasters?
“I don’t know that if there were warning signs that they were hitting you in the face and saying, ‘Here’s a warning, so don’t do this anymore’,” Bryen says. “Because things were so good for so long that people just didn’t expect it to happen. Now, I would say that the tech industry are the ones that go way up when their earnings don’t support it, and they start coming way down when their earnings still aren’t supporting things. But people start unloading, because they think they’ve reached the saturation point where they’re not going to go any higher. And that could be a warning sign. If a dentist has his or her investments in primarily high-tech, high-return types of investments, they’ve got to get diversified. They’re the first ones to drop. So, when they see that, sometimes they just think, ‘Well, it’s dropping, but it’s not going to drop any longer. So, it’s been so good. I’m going to stay in this sector and I’m going to ride it out.’”
“I don’t think there were signs,” Dr Levin adds. “Hindsight is 20/20, as they say. We can look back and say, ‘Well, we saw this.’ If everybody knew that the economy was going to slow down, that inflation was going to speed up, that staffing in the country–plus dentistry–would have a major effect, then the signs would’ve been there. I don’t think anybody can predict those things. I’m a believer that we live in a world of uncertainty most of the time, and we don’t know what’s coming. You don’t know when a Ukraine War’s coming. We don’t know when China’s going to invade Taiwan. Now, what does all this have to do with dentistry? Because if the economy slows down for any reason, dental patients start pulling back. I don’t know if the signs were there, but I’m going to predict that we have about a 1- to 3-year timeframe to work out of this.
“It’s not going to be overnight,” he continues. “One day last week, the stock market rose a lot and everybody said, ‘Oh, inflation’s over’. And then the Federal Reserve didn’t raise the interest rate as much. But I think we’ve got 1 to 3 years ahead of us of working through this. And my advice is that everyone should contribute the maximum they possibly can. I still believe that the way dentists become wealthy is by saving, saving early and living a little bit below their means and working hard. Without doing that, it’s unlikely that you’re going to accumulate a lot of wealth.”
Future financial crises may not have big, flashing warning signs. But, Dr Levin has advice to weather future storms.
“Number one, contribute the maximum allowable amount to your plan,” he advises. “A lot of people wait. ‘Oh, I’ll do more in a few years. I’ll do more when I’m 45 or 55.’ You want to contribute the maximum you can to your plan as early as possible and live on the rest. And that may not be popular, but certain basics don’t change.
“Also, be conservative in your investing,” he continues. “Going for what I call the ‘home runs’, swinging for those home runs, which some dentists do late in their career when they don’t have enough money, is very dangerous. I’m getting phone calls from dentists who want consulting help, because they’ve lost some or all of their life savings to cryptocurrency. I don’t know if cryptocurrency is going to be great in the future or not, but putting all your life savings into any one investment is not good.”
Those “home runs” are rare, and a better strategy is to be purposeful in one’s investments.
“Grow slowly over time,” Dr Levin says. “Be diversified. If you are diversified, you will get hurt a lot less by anything that happens. If you have good companies, they will come back. You just have to wait a couple years, so maximize your contributions. Be conservative and be diversified. And the reason is that dentists earn nice livings, but they’re not part of the ultrarich. So, if your portfolio declines significantly and you can’t make that back, that’s going to mean many more years of working.”
While the headlines scream about the negative impact on retirement savings, now is a great time to invest in the future.
“The younger person has an opportunity now with the market so low that that person can go in there and really start trying to get a 401(k),” Bryen says. “Even though there’s a maximum you’re allowed to put away by law, those people should take it. They should put the maximum away as the market is low. And by now, of course, people think the market can’t get lower, but at the age that a young dentist would be, now’s the time to put the money in it, because years from now, the market’s going to be higher again. It’s like a 10-year cycle almost when these things happen. The younger person’s got a tremendous opportunity with the market low. For all the naysayers, there’s opportunities out there if you’re willing to invest some money.”
Ultimately, Dr Levin says, the best way to avoid future trouble is to get your practice in as good a position as possible.
“What should dentists do now?” Dr Levin ponders. “The answer is: Grow your practice. Our data shows that almost every practice in the country has a 30 to 50 percent growth potential in about 3 years. There are a lot of parts and pieces to that in getting your systems in place, but if you increase production, you increase profits, and then you can increase retirement plan contribution and overall life savings. So even though we’re talking about all these effects externally, the internal effect is growing your production. It’s happened in 2008 and 2009, and I believe it’ll happen again today. Twenty-five percent of practices grew, and many grew very nicely. You want to be in that group. Focus on, ‘How do I make my practice more efficient and maximize my production?’”
The economy is never going to always be good, but it’s never always going to be bad, either. Responsible investing and savings can help dentists ride out the bumps in the road to successful financial planning.