by Michael Schuster, DDS
As a private practice dentist, you face a unique set of challenges in today's complex environment. From ongoing research and classroom discussions with other dentists, we have created white papers on topics related to management, leadership, sales, team synergy, freedom, and the creation of wealth. This is one of those white papers.
Research suggests that a typical graduating dentist in 2008 will incur $150,000 or more in school debt. Two years after graduation, he or she will buy or open a dental practice and be faced with $1 million or more in liabilities which can prevent the accumulation of wealth. While most practices will generate a great deal of cash flow, they will not create wealth or freedom.
In many instances, without proper planning, today’s dentist won’t be debt free from school and the start up of his or her practice until age 45 or older.
A dental practice is a cash flow machine
Doctors are notorious for making a lot of money (gross income) and living high lifestyles, but creating little or no wealth. It is critical to define what wealth truly is, and how it can be measured and created.
I will never forget a lecture I gave on wealth creation in December 1988 in Washington, D.C. A dentist came to me at the break looking very enthusiastic. He said, “My father was a physician and surgeon, and in the 1950s he was making more than $200,000 a year in net income. Yet, he never would have been able to retire except for the fact that his brother, a common laborer, preceded him in death and willed him all his money!”
He was telling the truth. But how could such a situation come about? There is a great deal of confusion about the difference between high income and wealth, and we need to start with definitions and facts.
Here’s a definition of wealth you can take to the bank: “Wealth is when the passive income (cash flow) coming in every month equals your active income (practice cash flow) for the rest of your life.”
We must distinguish income from wealth. Income is what you earn when you are in the chair, from dividends, rents, or royalties that you are paid on properties you own, or interest on principal owed to you. In theory, those who have high incomes should also be wealthy. But in reality, those at the very top of the wealth distribution often have high net worth not reflected in practice income or cash flow. In short, wealth is not simply a function of your gross practice income.
A major fallacy in thinking on the part of most professionals I have counseled the past 30-plus years is equating high gross income with actual wealth. I would say that 95 percent of professionals believe that increasing their income means increasing their wealth. Nothing could be further from the truth.
Recent national research shows that 90 percent of all general dentists in the United States have a net taxable income of $135,000, plus or minus $42,000 a year. Stated clearly, this means that 90 percent of dentists make a maximum of $177,000 a year or less, no matter what their gross income.
Habits regarding making and spending money are formed in the first five years of practice. As production increases, so do expenses. Federal, state, and employee taxes take their toll and extract 12 to 15 percent of gross revenues. Life is good as long as production increases. But also increasing are the fiscal responsibilities of a larger practice, family, children, and recreation.
Somewhere between the ages of 38 and 50, many dentists realize that if they continue on their current path, they will be perpetually “tied to the chair” … unable to slow down or retire because they don’t have a source of cash flow independent of their practice.
During a 25-year period, in 2008 dollars, a dentist’s gross cash income will be $20 million to $50 million. Our research shows:
- 60 percent to 70 percent or more of this income will be spent on day-to-day operations of the practice
- 10 percent to 14 percent will be spent on federal and state taxes
- 30 percent or more will be spent on the lifestyle of the dentist and family
The problem is self-evident. Recent independent research by the ADA shows that by age 55, the average dentist has accumulated $249,500 in assets (other than house and practice). The average dentist is increasing net worth at the rate of $8,316 per year. Simple math clearly shows that in an average practice there is little or no money left for savings. The majority of us (90 percent) spend our entire practice lives unprepared, without strategic goals or plans, to create sufficient cash flow to fund our futures.
Dentists and many health-care professionals make enough money to create wealth — in contrast to the plight of teachers — but if they don’t truly understand the concept of wealth, they can’t organize their businesses and lives to create it. This is tragic and unnecessary, and is truly a dreadful story.
Having studied and evaluated the financial statements of nearly 10,000 practices the past 30 years, I can tell you that rarely (less than 1 percent of the time) do those who focus on production as a way to create wealth succeed. Ninety percent of them fail because they either don’t understand true wealth or they work with the wrong methods and models to create wealth.
Dental school prepares us to pass state boards and get a dental license. It does not prepare us to run the day-to-day operations of a business. After spending seven to eight years in school and several years working in a practice, graduate school or residency, many of us either buy a practice or start one.
The vast majority of us have no working models of finance, time management, organization, sales, team development or purpose. Long term success in creating wealth and freedom is doubtful without master plans, mentors, role models, and monitoring.
The consequence of failing to create wealth:a life tied to the chair
No doubt you’ve heard of the famous Harvard study that reported the consequences of either setting or failing to set career and financial goals. In 1979, Harvard asked all its new MBA graduates about their professional careers:
- 3 percent reported having clear written goals and plans
- 14 percent reported having goals and plans, but not written ones
- 83 percent reported having no clear goals or plans
Ten years later, Harvard interviewed the same group:
- 27 percent, all from the no-goals group, currently needed financial assistance and weren’t self-sufficient
- 60 percent described themselves as living paycheck to paycheck
- 10 percent said they lived comfortably
- 3 percent said they had already achieved financial independence
The 3 percent were the exact same 3 percent who had written their goals and plans 10 years earlier. Their income from investments and businesses was already 10 times greater than the total income of the remaining 97 percent!
The Harvard study vividly emphasizes that goal setting and planning are necessary for even the privileged graduates of elite schools. The rate of “no success” among non-goal setters is striking.
The key isn’t the quality of an education or how much money one grosses; it is what one does with his or her money that makes all the difference.
Today’s generation, more than ever, wants it now. The dentist, family, and society have certain expectations of a lifestyle, of living and spending money and making up for ‘‘lost time’’ in school and working for others. It is OK to want it now, but wanting it all now has consequences.
Lifestyle, taxes, high costs of business and lack of planning and leadership lead to …
… being ‘‘tied to the chair’’ even more. Dentists are independent, hard workers. Most of us put our heads down and work hard to make our practices and lives successful. After about 10 to 12 years in practice, most dentists have built a successful lifestyle and practice in terms of revenue, but have not saved adequately for their children’s education. With college looming, even more cash flow is needed. Many dentists still have not developed a concrete plan for saving or investing for financial freedom.
By age 50 to 60, 90 percent of all dentists will still be ‘‘tied to the chair’’
We dentists seriously overestimate our lifetime ‘‘net earnings,’’ based primarily on an unrealistic estimate of our working life — I can work until I drop. We also spend too high a percentage of our estimated lifetime income on an annual basis. The result is often that we end up like lower income workers: overconsuming, failing to save, and encountering serious financial disaster later in life whenever the income from the practice is disrupted or we want to be ‘‘untied from the chair.’’
Conspicuous consumption is what is celebrated in our culture, not careful saving and investing. A great many dentists fall into this trap and fail to build wealth despite high incomes. The remedy implicit is that dentists must be counseled to take a careful and conservative look at their remaining expected work life and lifetime income.
According to the National Labor Statistics, a dentist’s net income before taxes over the next 10 years is likely to be $135,000 to $177,000 per year. Put in a conservative estimate of what you believe to be your remaining lifetime income, factor in debt and a healthy rate of savings, and learn what a reasonable rate of consumption is for you.
To create wealth, you don’t have to become a miserly consumer, but neither can you spend every dollar you make!
A practicing dentist, Dr. Michael Schuster founded The Schuster Center in 1978. Guiding over 3,500 graduates to achieve wealth and freedom, The Schuster Center is the first business school created exclusively for dentists. It will celebrate 30 years this year. Dr. Schuster is a cadre and former director at The Pankey Institute, adjunct faculty at The Dawson Center, OBI and LSU Cosmetic Continuum. Visit wwwschustercenter.com.
