Dentists, who are high-income earners, often do not have the education to make holistic financial decisions, but it needn't be so. This article presents a framework of actionable strategies for dentists to achieve their financial goals by implementing systems that accelerate the accumulation of wealth, while also defending against unplanned financial risks.
Recently, in an Apex360 Thought Leadership Series article, I shared why it is so important for dentists to make strategic financial decisions with a lengthy career and lifetime in mind. Unfortunately, the percentage of dentists (and Americans overall) that implement preplanned constructs for achieving their goals is minuscule. Fortunately, one need not make financial decisions haphazardly and foolishly. Poor money choices are too often indicative of an education system that equips budding professionals with the skills to earn high incomes while failing to provide them with the knowledge to make holistic financial decisions. That gap in knowledge creates susceptibility for dentists, who are high-income earners, to be misled by conflicted or myopic financial product and service providers.
The how of the matter is another issue altogether. A framework of actionable strategies for dentists to achieve their financial goals by implementing systems that accelerate the accumulation of wealth, while also defending against unplanned financial risks, becomes imperative. To that end, the following decision-making structure is designed to help dentists and their families accumulate, manage, and protect wealth over time:
Pay yourself first
Saving income into a qualified retirement plan starting at the youngest age possible can reward dentists with the power of compounding growth over a lifetime. The longer recurring deposits can be invested in a diversified portfolio, particularly when savings are pretax and grow tax-deferred over decades, the greater the likelihood that this will be the most beneficial financial opportunity available.
Always know where your money should go
Owners of a general or specialty dental practice can and should use benchmarks to identify appropriate ways to optimize production, collections, major expenses, and minor expenses.
Always know where your money does go
Once practice finances are directed where they should go, or could go, dentists should review their income statements to learn where money has been going.
Properly align financial priorities: needs, wants, and savings
Dentists can take specific steps to broadly align cash flow with Financial Balance Guide (a Buckingham Strategic Wealth tool) tenets so that no more than 50% of income goes to needs, no more than 30% goes to wants, and 20% can go into savings.
Properly align loans with the debt payment ratio
This principle is contradictory to how most dentists think. Rather than paying down debt as quickly as possible or avoiding debt altogether, wealth can accumulate tax efficiently at a faster rate through pairing an intentional debt repayment methodology with the funding of a qualified retirement plan structure.
Design the best pension strategy for your cash flow
As small business owners, dentists can use custom retirement plans to save very large sums annually on pretax and tax-deferred bases. Through a 401(k) profit sharing plan and the addition of a cash balance plan, cash flow permitting, retirement plans can provide the single largest tax benefit for a practicing or transitioning dentist.
Make peace with how much you can afford to spend
After years of frugal living throughout school, nobody wants to eat ramen noodles to save aggressively. Yet maybe one shouldn't buy a third home before solidifying a comprehensive plan that balances the wants of today with the needs for long-term financial health.
Take a comprehensive approach to investing
Portfolios should be considered in aggregate and in the context of your need, ability, and willingness to take investment risk. Picking stocks or trying to anticipate which direction the stock market will go in the near term is a loser's game.
Manage risk through proper insurance coverage
Insurance transfers financial risk from an individual or a small business to a larger pool of people and companies. Transferring risk protects against undesirable or unexpected events. Insurance is not an investment vehicle and it is not a retirement plan structure.
Establish an estate plan aligned with your objectives
A proper estate plan should include all documents that will empower successors upon your incapacitation or death, and also specify who and what will benefit from the transfer of possessions after death. A critical step is to properly title all accounts and beneficiaries consistent with the priorities listed in these documents.
It is important to recognize that these strategies are not arbitrary, but instead are designed to specifically support the pursuit of defined personal financial goals. Rather than becoming susceptible to a sales pitch, dentists should equip themselves with a process to work toward financial freedom regardless of what circumstances life may deliver in the future.
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. Buckingham is a member of the BAM Alliance, a community of more than 140 independent firms across the United States. To learn more and to find an advisor near you, please visit thebamalliance.com or contact Buckingham at (888) 470-3064.