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The new retirement landscape (and how to navigate it)

Nov. 1, 2008
It took an hour staring at a blank computer screen for me to write the title to this article.
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by Brian Hufford, CPA, CFP

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It took an hour staring at a blank computer screen for me to write the title to this article. Having spent a 35–year career helping dentists save for their exit from dentistry, and approaching age 60 myself, I am confronted by an unlikely retirement landscape. It is one that I would not have foreseen only five years ago.

For me, this "new" retirement landscape is both internal (related to my changing views on the meaning of retirement), and external (the current challenging economic and investment climate). To me, this new retirement landscape is concerned with three retirement challenges: Retirement: The New Definition, Retirement: The New Savings Challenge, and Retirement: The New Investment Challenge. These three challenges have interacted in a powerful way to radically change the "old" retirement landscape.

To me, the old paradigm of retirement is gone. This is the plan of working in dentistry to age 62, then moving to a warm climate and living from investment income. I think this paradigm died in 2000, the first year of the 21st century. I still have yet to hear anyone formally announce the "death" of the old paradigm, but it died just the same.

Perhaps financial planners are keeping the old paradigm alive via irrelevant mathematical calculations, unrealistic measures of investment returns and risk, along with ever–present life expectancy tables while keeping their ears plugged to the emotional fact that no one wants to become redundant and no longer needed by society. This approach leads me to a new definition of retirement.

Retirement: The new definition

The new definition of retirement is to achieve the best balance of work and leisure, at any age, while maximizing those pursuits that you love. To me, two factors must be present in the new definition or paradigm of retirement. Both factors are as important to a 35–year–old dentist as they are to one who is 65. Retirement is now a journey to increase these two factors throughout life and is not an event related to exiting dentistry.

The two factors are: 1) Living a balanced life of working coupled with significant leisure time so you can do more of those things you love and less of those things you hate; and 2) Having an emotional belief that one's future is always bigger than one's past.

Neither of these two factors is present under the old definition of retirement. Someone who has left the dental field is no longer working, and therefore, has an emotional context of the past being larger than the future. At the same time, most dentists love dentistry. So the idea of working at something one loves is gone. I am indebted to Dan Sullivan and the book "Always Increase Your Confidence" for helping me to develop this new definition of retirement.

As I search my mental landscape of the 1,000 or so dentists with whom I have worked during the past 10 years, I think of two who perfectly illustrate this new definition of retirement. Both dentists take one week off per month, and perhaps a total of 16 weeks per year, while being in the office four days per week during the working parts of the year. Both have loyal and dedicated staff and production and income levels that other dentists might envy. Both love dentistry. Both are in their 50s with savings that could support a decision to exit the profession.

Neither tolerates staff or patients who drain energy from others. Perhaps the ability for each to live like this has been fueled by a passion for outside activities, as well as a commitment to increase savings throughout their lives at a level that is much higher than that of the average dentist.

Both view their ultimate departure from dentistry as being caused by physical barriers of age at some later time and not by wanting a life of complete leisure by retiring in order to just sit on a beach.

The new retirement takes discipline and courage. Perhaps a start would be to take at least one week off per quarter with a two–week vacation each year. Develop passions outside of dentistry that will draw you out of the office into leisure time. Make a commitment to yourself to greatly increase taking time off, while at the same time significantly increasing your savings and income.

To the extent that you are unable to embrace this new definition of retirement, you likely also will be unable to embrace the old definition of retirement. Ultimately, both dentists I have mentioned have said that they will transition their practices during a longer period of time with reduced work schedules and more leisure time that is dictated by physical well–being.

Retirement: The new savings challenge

Savings and leisure time are twin concepts. Both must be cultivated with intention. A high income never guarantees an ability to save or have significant leisure time. Both savings and leisure are like well–fortified cities that must be taken with planning and force.

In partnership with the Academy of General Dentistry, my firm offers the "Mastering Your Financial Future" course to regional academy constituents. On the program's first day, constituents learn the Wealth Accelerator System, which is concerned with greatly increasing one's savings throughout a dental career. A financial tool called The Financial Balance Guide is illustrated for attendees. In my view, a dentist's financial life is in balance if savings are 20% of income–before–tax from dentistry. From my firm's recent Survey of Retirement Preparedness with the AGD, we found that most dentists are not saving close to this amount for a balanced financial life. With the investment challenges occurring in the 21st century, saving at a significantly higher level is paramount.

Recent pension law changes, such as the Pension Protection Act of 2006, have been allies in the ability for dentists to save significant amounts in a deductible retirement plan environment. Under PPA 2006, dentists can pair a 401(k) plan with a cash balance pension arrangement to achieve large deductible savings plans with low staff costs.

Currently, the average paired–plan arrangement that we design for dental practices achieves deductions in the $100,000–plus range, with full capabilities of dental staff members benefiting from their 401(k) plan savings.

To achieve the benefits of the changes from this law, dentists must have access to specialized professional pension firms with actuarial staff and lawyers. Most dentists use the 401(k) plans designed by brokerage firms, banks, insurance companies, and payroll processing companies.

Most of these product providers view the dentist's retirement plan as an employee benefit, like health insurance. Thus, the results achieved with most of these product–based firms limit the dentist from achieving the high deductions allowed under current pension laws. These plans might be appropriate for small businesses, but not for many dentists. They are not appropriate for dentists who plan to save sufficiently for retirement.

Retirement: The new investment challenge

I believe we are currently in a secular bear market that began in 2000. If you would like to read about secular trends in the U.S. stock market, the book "Investing in a Secular Bear Market" by Michael A. Alexander is a good starting place. Alexander states that a secular trend is a long period of time, approximately 16 to 20 years, in which rallies and declines take place within a larger overall trend. According to Alexander, the average secular bull market, like the one from 1982 to 2000, creates "real" stock market returns of approximately 13% per year. Meanwhile, the average secular bear market exhibits overall returns of only 0.3% per year.

According to data provided by Ned Davis Research, through July 2008 the S&P 500 Index has returned a 32% cumulative return for the past decade, as compared to U.S. Treasury Bills (or cash), which have yielded a cumulative return of 40%. In other words, stocks have underperformed cash in the past 10 years. According to Ned Davis, this is the lowest return of stocks as compared to cash in 68 years.

Whether you believe that longer cycles in stock markets can be identified, much less be navigated successfully, the current landscape has created the need for new investment strategies and new practice transition strategies. Asset values in stocks and real estate were inflated to a great degree by the largest debt bubble in U.S. history. The deflating of this debt bubble will greatly affect asset prices in the future.

Under the old retirement paradigm, what this likely will mean to early retirees is that withdrawal rates should not exceed 4% per year. For each $1 million in retirement savings, one would withdraw $40,000 per year of retirement income.

I believe that the new definition of retirement is better than the old one. The new definition calls for a lifelong focus of increasing leisure time, doing what you love in your practice while increasing savings to allow for the courage to live the life of your dreams. Instead of a goal to exit dentistry completely, it calls for savings, investment, and leisure strategies that help create a balanced and happy life.

Brian Hufford, CPA, CFP®, is CEO of Hufford Financial Advisors, LLC, an independent, fee–only planning firm that helps dentists achieve financial peace of mind. The company is recognized as the only strategic alliance partner for financial planning services for the Academy of General Dentistry. Contact Hufford at (888) 470–3064, or at [email protected].

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