Does financial planning end at transition?
There are two phases in adult financial life: accumulation and distribution. Here’s how dentists can plan for the latter.
Rob Ziliak, CFP
Imagine that in the near future you’ll have turned over your office keys, deposited the proceeds from the sale of your practice, and ordered a hurricane at half past noon while chair-dancing to “It’s Five O’Clock Somewhere.”
You’ve planned on reaching this celebratory beach vacation over many years of serving your community, and by age 65 you’ve diligently accumulated the wealth you need to retire. For completing a solid plan, you’ve earned congratulations and personal satisfaction. You’ve won the game. Other than tee times, volunteer activities, and family trips, there isn’t much planning left to do.
Or is there? In reality, you are just beginning the second phase of your financial life. While it is indeed five o’clock somewhere, you still need to determine whether you’re actually in that time zone, financially speaking, or if you’re a couple of hours behind.
There are two phases in adult financial life: accumulation and distribution. From dental school graduation through the sale of your business, you are in the accumulation phase. During that time, your goal is to generate sufficient financial resources so you won’t run out of money before you run out of time. You may have additional goals, yet virtually all professionals have a minimum objective of providing for their own needs in retirement rather than becoming a financial burden to their children or the government.
Once there is no more earned income, the distribution phase begins. Conversion from accumulation to distribution is a paradigm shift that requires prudent strategies to manage and execute. For many dentists, the distribution phase generates greater emotional angst than the accumulation phase. Even though the purpose of accumulating assets over a career is to distribute them throughout the nonworking years, the fear of spending money when you’re not earning income can be overwhelming. Questions abound: What if you spend too much, too fast? What if you live longer than anticipated? What if you need assisted living or skilled nursing care? Can you support your kids’ families if they need help? Can you afford to spoil your grandchildren? What if you need to support parents who run out of money or go into poor health? How much travel can you afford? Do you need to sell your lake home and boat so you can afford other lifestyle priorities? All of these questions and more can be answered with proper advanced planning, which provides the necessary peace of mind to spend joyfully and with confidence.
Short of being diagnosed with a terminal ailment, it’s highly unlikely that you will know precisely how many years you have post-transition. According to the Social Security Administration’s life-expectancy calculator, a 65-year-old woman today should estimate living to approximately age 87, and a 65-year-old man should estimate living until age 85.1 But life expectancy is increasing, as is the cost of the medical care that’s extending it. As a result, retirees should financially prepare for maintaining a standard of living until the age of 90.
We now have an end goal in mind—supporting a lifestyle for two people over the 25 years following retirement without running out of money. The list of wealth management and preservation issues to plan for over multiple decades is substantial and dynamic, so plans may need updating several times. While not an exhaustive list, all of the following areas can affect successful distribution outcomes: retirement income planning, portfolio planning, tax planning, risk-management planning, and legacy planning.
Retirement-income planning is necessary for funding your lifestyle once you stop receiving a paycheck. This includes strategies for optimizing Social Security retirement benefits, required minimum distributions, withdrawals from taxable accounts, and possibly pensions and annuities. Without addressing and coordinating these many moving parts, how will you obtain money to pay monthly expenses?
Portfolio planning is necessary to pursue goal-based results through periodic retirement projection updates. If your spending desires require your portfolio to generate 5% returns net of taxes and fees, yet your portfolio is structured to generate 3% returns after taxes and fees while inflation is at 3%, your adult children may need to have a bedroom ready for you.
Taxes have the power to quickly erode retirement income, investment returns, and Social Security benefit payments. After paying significant taxes throughout your career, you have many options available to minimize their impact during retirement.
Risk management includes all forms of insurance coverage. You may be overinsured, underinsured, or appropriately insured in any given area. Health insurance—Medicare and Medicare supplements included—is quite complex, and long-term care insurance is even more complicated. If you and/or your spouse need skilled nursing care for three years at a cost of $100,000 annually, will you still have money to use elsewhere?
Legacy planning can be as simple as having your accounts updated with your desired beneficiaries. (Do you have a former spouse listed as the primary beneficiary on that long-forgotten IRA?) However, planning your legacy also includes keeping your estate documents current. This ensures that the people and charities you care for the most will be the recipients of your remaining assets. Remember to include a living will and power of attorney as well, so that a loved one or two can make critical medical and financial decisions on your behalf in the event you become incapacitated.
Given current trends facing dentists, a fair question is, when should you addess all these issues? The answer is to start solving the most critical issues now (if they’re not already solved).
As I’m sure you are painfully aware, dentistry is a physically demanding profession, generating lingering challenges that can affect overall health. Then there are the diseases that affect all of us. The Centers for Disease Control and Prevention reports that for Americans age 65 and over, heart disease is the leading cause of death.2 Referred to as the silent killer, symptoms of heart disease can sneak up on us, not always displaying their true severity before delivering a blow that may lead to death or incapacitation.
Interestingly, the Kaiser Family Foundation revealed that in 1980, Americans had a similar life expectancy at birth to those in comparable countries. In 2015, average life expectancy in the United States was 12th highest and, at 78.8 years, lagged the comparable country average by more than three years.3 The fastest way to alleviate the risk of unintended consequences, should your happy and active life be cut short, is to plan accordingly while you are still mentally and physically able. While you need to plan for a lengthy lifetime posttransition, there is no guarantee that it will occur, so enjoy the time you have.
Given the abundance of planning considerations in the distribution phase, it’s understandable if you are now rethinking that retirement beach vacation. Remember, you have excelled in the dental profession because you mastered clinical techniques and chairside relationships with patients, not because you completed a master’s degree in financial planning. Establishing a comprehensive, evidence-based financial strategy that answers emotion-laden questions will allow you to distribute wealth with confidence. If you are unsure about how to approach any or all of these topics, connect with a well-credentialed fiduciary wealth advisor who can quarterback solutions for all these issues.
Once you are confident that you are in the right financial time zone, convert to island time and enjoy the relaxed pace.
1. Retirement & Survivors Benefits: Life Expectancy Calculator. Social Security Administration website. https://www.ssa.gov/cgi-bin/longevity.cgi. Accessed June 15, 2018.
2. Ten leading causes of death and injury. Centers for Disease Control and Prevention website. https://www.cdc.gov/injury/wisqars/LeadingCauses.html. Updated April 13, 2018. Accessed June 15, 2018.
3. Gonzales S, Sawyer B. How does U.S. life expectancy compare to other countries? Peterson-Kaiser Health System Tracker website. https://www.healthsystemtracker.org/chart-collection/u-s-life-expectancy-compare-countries/?_sf_s=life#item-start. Published May 22, 2017. Accessed June 15, 2018.
Rob ZiliaK, CFP, is an advisory team director at Buckingham Strategic Wealth, a comprehensive wealth management firm with a niche practice area that focuses on financial solutions for dentists and their families. Through a holistic, evidence-based approach to strategic planning, Buckingham helps dentists connect their finances with their values to realize their most important goals. Buckingham also offers ADA CERP-recognized continuing education courses for dentists. To learn more, visit buckinghamadvisor.com or contact Buckingham at (888) 470-3064.