The dental profession offers significant financial rewards for those who navigate it properly. The path to profitability, debt reduction, and smart investing is not without obstacles. Given the often significant debt burden that comes with educational loans and starting or acquiring a dental practice, it's not hard to see why a lucrative professional environment so often introduces a high level of financial-related stress.
With big professional dreams and a lot at stake, it's all the more important for dentists to maintain financial discipline; it enables them to achieve professional success and ensure long-term financial security for themselves and their loved ones. Here's how to make that happen.
1. Get liquid.
The dental profession is fundamentally an entrepreneurial endeavor. Many dentists are advised in dental school to acquire or start their own practice as soon as possible.
This entrepreneurial mindset is commendable but results in dentists having a great deal of their net worth tied to one legal entity. Running your own business creates concentration in your wealth, especially early in your career.
Consequently, a priority for dentists (and their financial advisers) is to consistently leverage their skills and hard work to create personal wealth. The goal is to diversify your investment assets. While growing the value of your practice is of the utmost importance, having high-quality investment assets to show for it on the other side is equally vital.
Younger dentists need to be especially mindful of this priority. Early in your career, it's easy to get tied up in the excitement of building a practice. But if not enough of the practice's income is being distributed to the dentist as a result of imprudent practice spending, what is it all for?
Dental practices are not charitable organizations! A practice can have a massive top-line revenue figure, but if it doesn't translate into personal net worth on the other side, there's a problem.
2. Maximize your savings.
Retirement plan management is a critical piece of the savings puzzle. There are essentially three categories of pretax investment strategies: a standard arrangement where you defer your own money, a profit-sharing plan that allows you to defer more of your earnings, and a cash balance plan.
While you should always consult with an adviser on how best to proceed, a cash balance plan addresses the problems facing dentists near the end of their careers. Those dentists are generally paying a high effective tax rate and may be facing sizable capital gains tax liabilities that will likely result from the sale of their practice (at a time when retirement saving is most crucial).
A cash balance plan is a qualified IRS-approved plan that allows for the deferral of ordinary income (thereby reducing your current year's tax liability) and the maximization of retirement savings in the years leading up to your practice sale. A 55-year-old dentist, for example, can defer more than $220,000 of earnings with a cash balance plan (subject to actuarial calculations) on top of the $67,500 they can defer in a 401(k)/profit-sharing plan, boosting their tax savings to over $127,000, assuming a 44% rate and nearly $290,000 of deferrals.
3. Take the bull (market) by the horns.
A postpandemic surge of patients has meant packed calendars and busy dentists. Don't let the good times lull you into a false sense of security.
Take advantage of bigger profits by being disciplined at a time when others might not be -- and focus on making good investments when everyone else is taking excessive risk. Higher-than-usual income presents real opportunities to bolster your investments and safeguard your family's long-term financial security.
4. Assemble a team.
The dental market is inherently fragmented with lots of entrepreneurs and individual business owners. As a solo practitioner or the head of a practice, the best thing you can do is build a strong support team of qualified and trusted professionals who can help you maximize your personal net worth while maximizing the value of your business. From a financial standpoint, it's advisable to have advisers with a CPA background who can look at your balance sheet and your income statement to make informed decisions.
5. Protect yourself.
Managing your debt is critical. Dentists have substantial student loan debt but astronomical income trajectories.
With that in mind, pay yourself first. Advisers can and should be talking you through the different insurance plans you accept and advising you on how to optimize your practice's 401(k) and profit-sharing plans. Remember that there are no guarantees.
Dentistry is a physically demanding profession that takes a toll on your hands, back, and neck. Make sure you have disability and life insurance in place that's sufficient to protect your family's income if you get disabled or die. Taking care of these priorities now is the best way to set yourself up for long-term professional success and personal financial security.
Chris Nemes is a partner at Nemes Rush, a wealth management firm specializing in financial planning and investment management. Nemes' comprehensive experience as a CPA has helped reinforce the importance of sound financial planning and investment analysis that he provides to dentists.
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.