Today’s generation of retiring dentists came of age in a different financial world. The investing strategies you’ve heard your mentors talk about may have benefited them, but because of today’s economic climate, you will most likely have to take a different approach. But the story isn’t all doom and gloom, just different. In fact, if you make good investment strategies right out of the gate, you will create opportunities to call the shots for yourself—namely, when to retire, and with how much.
The old rule of thumb about saving 10% of your pre-tax income Is no longer enough. We encourage today’s new dentists to save at least 15-20%, if not 25%.
One financial "problem" (and this is definitely a high-class problem—exactly the kind we want to have) is that we are living longer. Thus, our money has to last longer in retirement, or we have to postpone retiring. Another financial problem facing younger vs. older doctors is that investment returns will likely be less robust for the next 10-20 years than they were for the last 35. Lastly, young doctors are graduating with student debt loads that were unheard of even 15 years ago.
Saving that much may sound daunting, but we commonly see our clients and seminar attendees saving 15-25% of pre-tax earnings in their practice retirement plans. These savers learned the power of saving and compounding and then set their standards of living sufficiently below their incomes in order to let that combination work for them. Not a single one (or a single spouse) ever reported that they regretted their approach or that they denied themselves anything they thought they should have in order to fund their retirement plans.
Over the long term, stocks have outperformed other investments. Duff & Phelps, LLC, the New York financial services company, calculates large company stocks have had a long term average compounded total return growth rate of 10.0% per year from 1926 through 2016. By comparison, similar statistics are about 5-6% for bonds and 2.9% for inflation.
But the stock market does not rise in a straight line. It can be volatile from month to month and year to year. It will continue to fluctuate, but should have a long term upward bias. Why? Because we have an economy that grows—and, long term, as the economy expands, good companies grow, their incomes rise, and their stock prices follow. You may experience a significant drop every decade or so, but these occasional market downdrafts are temporary. Stocks will continue to outperform bonds and cash investments over the long haul, say 20 years or more. Most doctors have time horizons longer than that.
One of the best financial decisions you can make is owning your own practice as soon as you are able. The ADA’s Health Policy Institute reports that the percentage of dentists under age 35 who own their own practice fell from 44% in 2005 to just 28% in 2017. This isn’t for a lack of practices for sale. Rather, it’s young doctors’ perceptions that their high student debt precludes them from taking on even more debt to buy their own practice. They gravitate to the corporate dental clinics with higher starting salaries and the promise of a better lifestyle that doesn’t include time-consuming practice management. This type of thinking is counter-intuitive. Buying a practice or buying an interest in a group practice is typically the best economic (and the best quality of life) alternative. Most dentists will see such a large increase in pay (from now sharing in practice profits rather than being paid as an associate) that the buy-in payments will be affordable, and he or she will still see a modest boost in net income.
Need advice on how to best invest in your future? Collier & Associates can connect you with the resources and guidance you need. Contact us for more information, or subscribe to the C&A Newsletter for ongoing expert advice.« Back to Blog