Mr. Hufford does a great job of emphasizing the power of compound growth in this useful interview (July Dental Economics®, The Dalin Exchange,). Unfortunately, compound growth does not work for dentists like it does for other professionals who commence their careers earlier and without as much debt. The lack of compound growth in the shorter economic life cycle for dentists poses a serious problem in financial planning.
I was surprised that the article did not emphasize defined benefit pension (DB) plans more. DB plans can be seen as the very answer to the compounding growth problem faced by dentists. While other professionals have volatile or cyclical earnings, the practice earnings of a dentist are relatively dependable and more appropriate for a DB plan. If the dentist contributes the maximum to a DB plan and 401(k) profit sharing plan between the ages of 45 and 55 (approximately $220,000 annually), and then contributes to the 401(k) profit sharing plan between ages 55 and 60, it actually brings his or her retirement savings at age 60 closer in line with that of other professionals who commence saving at age 30. Incidentally, the legislation behind these contribution levels for DB plans was recently made permanent by the Pension Protection Act of 2006 (PPA ’06). PPA ’06 also loosened the deduction limits for dentists who sponsor both a DB and 401(k) profit sharing plan. This means that many dentists will be able to put $27,000 to $32,000 into a 401(k) profit sharing plan at the same time they are making large DB plan contributions.
Although dentists do not seem to focus on significant retirement funding until age 45, there is no magic to this age. It is important to note that DB plans fund to the same maximum benefit at retirement age whether you start contributing at age 30, 40, or 50. For those dentists who have the wherewithal, I recommend they start funding a DB plan at age 40. Commencing the maximum contributions to a DB plan at age 40 (even if it is a smaller dollar contribution), instead of age 45 or 50, simply means you are letting the market, and time value of money, carry more of the load. I do not speak for everyone, but I know I would rather work harder and save at age 40 than at age 50!
Robert M. Cheney, CFA, CFP®
Greenbook Financial Services
Portola Valley, Calif.
Response by Brian Hufford
Mr. Cheney is correct in advising his clients to utilize defined benefit plans as they get older. For readers who missed the article, on page 42 I stated, “We recommend that dentists begin funding a retirement plan at the maximum level available for their age.” I then went on to recommend DB plans to doctors who are 45 or older. The point Mr. Cheney is making is that it is possible for late-starting doctors to fund larger amounts. This is an important point. The only caution I would offer is that it is unwise for younger doctors to miss the first 10 years of compound growth between ages 35 to 45, hoping they can catch up later by funding “$220,000” per year in a defined benefit plan between ages 45 and 55. While there are some very high-earning dentists in this golden age of dentistry, I would guess that less than 5 percent of all dentists could afford a $220,000 annual pension contribution over 10 years.
Brian C. Hufford, CPA, CFP®