Every clinician’s situation is different, but everyone needs to know how to best prepare so that you can enjoy those retirement years.
Have you heard young dentists say that they can’t afford a retirement plan? Have you heard them say that they are not even going to be thinking about retirement for at least another 40 years? Has a dentist who has been in practice with a nice amount of income for many years told you that he or she has not thought about putting money into a retirement plan?
A lot of factors play a role in someone’s retirement plans and the scenarios mentioned above are not all that uncommon.
Clinicians give many reasons for their retirement delays and concerns such as there were children to put through college, divorce bills and alimony to pay, and there was never enough money left over to think about funding a retirement plan. As a consultant, don’t you want to shake the dentist and make him or her wake up and listen to some reasonable common-sense logic?
The 26-year-old doesn’t realize how fast time can get away from him or her. The older dentist can’t keep working the hours with the stress on his or her mind and body. What should each of them do before it’s too late for them to make sure that there is money to live on when they can no longer work as they have been? Let’s look at each scenario and help them survive the stress and aching muscles that are sure to come.
Let’s start with the younger dentist and work our way to the older dentist
Hypothetically, our younger dentist is about 26 years old. He or she has a lot of student debt plus debt that was needed to live on while undergraduate school and dental school were occurring, and classes were being attended. Now that graduation has taken place and a job with compensation has begun, there is money to pay the rent, for groceries and minor expenses with a little bit left over each month. The younger dentist may want to take some of the little bit that is left over to begin funding a not too expensive retirement plan. Assuming there is about a 40-year period of work available, a simple plan where $500 per month was saved until more money could be deposited into a retirement plan will grow to an enormous amount. At 5% for 5 years compounded monthly, the dentist will have about $35,000 in the retirement account. At age 31, the starting balance will be about $35,000. With promotions, raises and another 5 years of putting away $1,000 per month at 5%, an accumulated amount of almost $113,000 will be realized.
Can you imagine if amounts larger than $500 per month and then later $1000 per month are saved in a retirement plan by the younger dentist? Thinking logically, the dentist must think that more can be saved and for a longer period of time because the skill set will be much improved, and referrals always multiply once the good name of the dentist starts to spread.
Now, let’s take a look at the older dentist
Our hypothetical older dentist is 65 years old. This clinician has never been able to save anything based on putting 2 children through college, an untimely expensive divorce, and living in a nice house with an expensive car. Vacations were also taken that were not cheap.
Now the dentist is meeting with a retirement plan consultant who explains that unless there is money that is saved soon, the dentist may have to work until he or she dies. The consultant explains that unlike the younger dentist who has 40 years to build the retirement plan, the 65-year-old will have a much shorter window of time. He or she must put away as much as possible and as fast as possible.
The consultant should let the dentist know that a special type of retirement plan will allow the dentist to save about $150,000 in the retirement plan each year if it can be afforded. After studying the consultant’s financial situation, the consultant determines that the dentist can afford $150,000 per year, including the enormous tax benefits that the dentist will receive. To calculate what amount the dentist will accumulate if $150,000 a year is saved for 5 years at 5% compounded monthly, the result is over $865,000. Over the next 10 years, at 5% interest, the retired dentist would receive a little more than $9100 per month. One of the good things about the retirement plans is that the assets in the plan are immune from creditors, deductible from your income when the payment is made into it and the income accumulates without tax until it is withdrawn.
What should be done to implement a retirement plan no matter what the age of the dentist who wants to do so?
If as a dentist you have retained a dental CPA, you are already at a good starting point. Have the dental CPA analyze your income to see what you can afford to put into the retirement plan for the next 5 years. Eliminate things that are not necessary to your well-being or that of your family. Don’t’ forget the tax effect of the savings benefit from the implementation of the retirement plan. You now have a legitimate amount that can be saved each year.
Let your dental CPA or you as the dentist should contact an excellent retirement plan designer to assist in adopting the type of employer sponsored qualified plan. Begin its implementation and start funding the plan as soon as possible. You can now reduce the quarterly tax payments you have planned. Work as hard as you can for the next few years and if younger, work more years. Your dental CPA and your consultant will be extremely pleased with the decision you are making about the rest of your life and how you will live it, financially. More importantly, you will be overjoyed with the decision as you start collecting your monthly retirement benefit when you are no longer practicing dentistry.