We help dentists plan for many phases of their careers and ultimately their financial independence. Retirement and transition planning conversations take place throughout many of our meetings. The key here is to strategically invest money according to a well thought out and implemented plan.
For more information on financial planning for dentists please use the following hyperlink. Financial Planning for Dentists
Why do Dentists need a Retirement / Transition Plan?
I imagine you'd like to maintain your current lifestyle after you transition away from your practice, which is very possible if you plan ahead. Without a plan, you may be looking at the possibility of working in your practice for longer than anticipated, selling your practice for less than anticipated or having to make serious lifestyle sacrifices in your retirement years.
1. Relying on the sale of a practice to fund your future lifestyle can be risky business. In general, we tend to overvalue what is closest to us and your practice is likely no different. The sale of a practice can fund some of your retirement, depending on lifestyle and sales price. If you think your practice is valued at $500,000 and it's really only worth $400,000, then what? A retirement plan can help ensure you're able to walk away on your terms, regardless of the sale price.
2. Retirement plans can help fund practice buyout. Some retirement plans can be strategically set up to help fund an installment sale of a practice while continuing to build retirement assets.
3. Evolving tax rates. Depending on how much and where you are saving could determine when your retirement funds will be taxed and by how much. Tax rates are at historical lows right now and the likelihood of rates staying this low are, in our opinion, low.
- Plans like a 401(k) or IRA are funded with pre-tax dollars but are taxed as ordinary income when they are withdrawn. You are also required to withdraw funds from these accounts at 70½ which can make legacy planning more difficult
- You may prefer a Roth IRA or Roth retirement plan to help reduce your future tax bill. Having a portion of your savings strategy taxed today but tax-free in retirement may be a better approach.
- Finding a blended tax efficient investing strategy is important to help maximize future tax planning.
- You should to prepare for potential capital gains tax from the sale of your practice. You can be caught off guard if the practice sells for significantly more than you paid for it. With proper planning you can make the tax liability more predictable and manageable.
4. Compounding interest. You might be familiar with the concept of compound interest. The earlier you start to save, the longer your money has potential to grow and the more you'll likely have when you need it the most. $1,000 a month when you're 35 years old is much more palatable than $10,000 a month when you're 55.
5. Asset protection. Early in your career you likely have significant liabilities, however; as your career blossoms those liabilities are generally reduced and you have the opportunity to build assets up to become significant. Working with your legal advisor can help ensure these assets are protected with proper titling and entity structure. Also, certain strategies may help protect your assets from creditors.
A comprehensive financial plan can help you determine what investment, insurance, tax, and protection strategies are appropriate for your situation.
No matter where you are in your dental career, thinking about how you're your life will look like after practice ownership and what steps you need to take today can help you pursue financial independence. This can give you the flexibility you need to take control of your next phase of life.
This article is meant for educational purposes only. The information presented does not constitute individual investment advice, nor is it a solicitation for the purchase of any investment or insurance product, or a recommendation to take a particular course of action. You should consult with your tax, legal, and/or financial advisor prior to making any financial decisions. Investing involves risk, including the potential for loss or principal. 03/19