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.
John G. McCarthy III is a partner with Heritage Financial Consultants.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 a March 2016 report from the Employee Benefit 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, a challenging dental economy, excessive spending, soaring healthcare costs, and other factors can wreak havoc on your chances of securing a comfortable retirement. The good news is there is plenty you can do right now to determine what your ideal retirement is likely to cost and plan accordingly. Start with a review of the following key retirement income issues.
1. Your life expectancy
Thanks to medical breakthroughs, retirees today are living longer than ever. The average life expectancy once you hit age 65 is an additional 17.9 years for women and 14.4 years for men. In fact, depending on your health and family history, 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 scrubs, commuting, and going out to lunch 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 determine how they are likely to change over time.
In general, retired dentists may need roughly 75% of their preretirement living income (adjusted annually for inflation) to retire comfortably. Purchasing long-term care insurance can help defray the often enormous custodial care costs that can devastate personal wealth.
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. Such a portfolio will probably include a healthy dose of stocks for growing your income as well as protecting your purchasing power.
The fact is that even retirees need to stay invested in stocks to outpace inflation. For example, a retired couple with current expenses of $85,000 will need approximately $153,500 to pay for those same 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 as well as 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 Social Security income, withdrawals from retirement plans, taxes, and any planned gifts to charity or heirs. 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 upon death must factor in how these transfers of wealth 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 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.
Once you've reviewed these factors, you'll have a better understanding of your retirement goals and challenges. If you currently aren't saving enough, there are plenty of ways to get back on track. One strategy may be to make changes that will enable you to spend less in retirement, such as trading down to a smaller home.
Conversely, if you're several years or decades away from retirement, 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 guarantee that a portfolio will produce better results by assuming more risk. However, in the end, the process of mapping out your retirement income needs will give you an important advantage -- the knowledge of where you are today, and what it will take to obtain the retirement you desire.
John G. McCarthy III is a partner with Heritage Financial Consultants and a registered representative of Lincoln Financial Securities offered through Lincoln Financial Advisors, a broker-dealer (Member SIPC) and investment advisory. Heritage Financial Consultants is not an affiliate of Lincoln Financial Advisors. Lincoln Financial Advisors does not provide legal or tax advice. CRN-1559901-080116
Disclaimer: The comments in this article are not meant to be taken as financial advice. DrBicuspid.com and the Levin Financial Group recommend 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.
