This article from Heritage Financial Consultants draws on the same core materials that are included in the management consulting program for Levin Group clients. By gaining a deeper understanding of their financial situation and the options available to them, dentists can make informed decisions that will enable them to reach their retirement goals sooner.
— Roger P. Levin, DDS
How much money will it take for you to retire from your dental practice in style? Will $1 million do the trick? How about $5 million? Or perhaps you can get by on less.
If the question leaves you scratching your head, you're not alone. Fewer than half of U.S. workers have estimated how much they'll need to retire, according to the Employee Benefits Research Institute. The biggest risk retired dentists may face is running out of money while they're alive. It's an all-too-possible scenario, even if you have substantial assets.
An extended market slump, challenging dental economy, excessive spending, soaring healthcare costs, and other factors can wreak havoc on your chances of securing a comfortable retirement --as well as meeting other financial goals such as transferring wealth to heirs or charities. The good news: There's plenty you can do right now to determine what your ideal retirement is likely to cost and plan accordingly. Start with a review of six key retirement income issues.
1. Your life expectancy
Thanks to medical breakthroughs, retirees today are living longer than ever. Considering that the average life expectancy once you hit age 65 is 14.4 more years for males and 17.9 more years for females, according to the Centers for Disease Control and Prevention, you could live much longer -- so it pays to aim high. You should anticipate living to 100, which is a reasonable number these days. It's smarter to plan for a longer retirement and not get caught short.
2. Your retirement expenses
Once you stop practicing dentistry, expenses such as clinical apparel, commuting costs, and perhaps even your mortgage might fall or disappear entirely. However, your spending may spike for travel and leisure, gifts to family members and -- perhaps most important -- medical care and prescription drugs.
Your financial planner can help you review your current expenses and whether they are likely to change over time. In general, retired dentists may need roughly 75% of their preretirement living expenses (adjusted annually for inflation) to retire comfortably. And long-term care insurance can help defray the often enormous custodial care costs that can devastate an income stream.
3. Your portfolio
As part of the retirement planning process, your financial planner will estimate the average annual rate of return your savings and investments must earn to help meet your spending requirements and other goals. Then, an optimal portfolio of investments will be crafted that takes the lowest level of risk necessary to earn that potential return.
Chances are, that portfolio will include a healthy dose of stocks for growth potential and to help protect your purchasing power. The fact is, even retirees need equity exposure to outpace inflation. For example, a retired couple with current expenses of $85,000 will need approximately $153,500 to pay for their expenses in 20 years, assuming a modest 3% annual inflation rate.
4. Proceeds from the sale of your practice
As you approach retirement, you will also be planning how to transition your practice to new ownership. The specifics of this major transaction -- not only how much you will be paid but also the structure of the sales agreement, timetable, and tax implications -- must all be taken into consideration by a dental-knowledgeable financial planner. Working together, you can plan for a transition that will be most advantageous to you and your heirs in the near term and in future years.
5. Your withdrawal strategy
The amount of money you draw from your portfolio each year will have a huge impact on how long your nest egg lasts. The appropriate withdrawal rate varies for each investor, of course, based on factors such as how much income you might receive from Social Security and a retirement plan, taxes, and if you wish to leave money to any heirs or charities, but it is generally estimated to be no more than 3% to 4% of your total.
You'll also want to discuss with your financial planner whether it's best to tap any tax-deferred plans first or start taking income withdrawals from taxable accounts given your situation and goals.
6. Estate planning and philanthropic goals
Dentists planning to gift assets, either while alive or on death, must factor in how their wealth transfer goals might affect their expenses and cash flow in retirement. For instance, you might want to consider strategies for leaving more money to heirs and charities and less to estate taxes if you have a sizeable estate. Tools such as charitable trusts and insurance can help strike a balance between meeting current living expenses and providing for future objectives.
Hopefully, your analysis will reveal that you're well on your way toward achieving a secure retirement from your dental practice. If not, don't fret -- there are plenty of ways to get back on track. Consider making changes that will enable you to spend less in retirement, such as trading down to a smaller home. Retirement is often the perfect opportunity to pursue interests that you didn't have time for when you were practicing dentistry.
Conversely, if you're several years or decades away from retiring, saving and investing more aggressively -- not to mention planning now for achieving higher practice valuation when it's time for the transition -- may help you build greater wealth over time. But remember, there is no assurance that by assuming more risk a portfolio is guaranteed to achieve better results. In the end, the process of mapping out your retirement income needs will give you an important benefit: the knowledge of where you are today, and what it will take to help obtain the retirement you desire.
John G. McCarthy III is a partner with Heritage Financial Consultants.
For information about the comprehensive suite of financial planning and wealth management services offered by Heritage, contact the author at 410-771-5677.
Disclaimer: The comments in this article are not meant to be taken as financial advice. Levin Financial Group recommends that you always consult with your financial planner before making any significant changes in your financial situation.
The comments and observations expressed herein do not necessarily reflect the opinions of DrBicuspid.com, nor should they be construed as an endorsement or admonishment of any particular idea, vendor, or organization.