Saving 10 percent: Is it enough?

Oct. 1, 2006
As I have read financial publications through the years, it seems to me a basic rule for financial success is to save 10 percent of income.

As I have read financial publications through the years, it seems to me a basic rule for financial success is to save 10 percent of income. I am sure you have read this, too. But recently, I have been seeing this number increase to 15 percent and higher. I want to examine the current status of this rule of thumb and, in the process, help you determine your strategy for saving.

First, let’s look at this basic rule of retirement success: saving 10 percent of income. How should we go about proving this statement as true or false in dentistry? This is how I would frame the answer. The most common production/overhead/profit equation in dentistry is 100 percent/65 percent/35 percent.

In other words, a general dental practice typically has 65 percent overhead and 35 percent profit. Therefore, saving “10 percent of income” means saving 10 percent of the 35 percent of a dental practice’s profit. This translates to 3.5 percent of gross production. For production of $800,000, this translates to a profit of $280,000 and a savings of $28,000 per year. To me, this would mean all savings for the doctor - both pension and personal.

Our research of dentists’ savings indicates that the average savings is 3 percent of production, both pension and personal. The good news is that this means that many dentists are saving close to 10 percent of their net incomes. The bad news is that this may not be nearly adequate to retire. Why is this?

Our research also indicates that most dentists do not save significant amounts until they are approximately 43 years of age. Dentists start saving much later because of the extra years of education, and the significant load of student loans and capital expenditures for purchasing and equipping a practice. So is saving 10 percent enough?

If you had to retire today, how much income would you need? Many questions that need to be resolved to accurately answer this question: the amount of debt, the needs of children, the level of current savings to subtract, etc. In my experience with retired dentists, I believe that - in the best of circumstances - you won’t be able to live comfortably on less than 50 percent of current income before taxes.

In our above example of $280,000 of income, this would mean retirement income of 50 percent x $280,000, or $140,000. Once retirement income need is known, the savings calculation is straight forward. Most experts, myself included, feel that it is not safe to withdraw more than 5 percent of your retirement capital each year. We recommend that a safer withdrawal level is 4 percent. At a 5 percent withdrawal, the savings needed in today’s dollars is 20 x $140,000 or $2.8 million.

Now let’s take the factoring of inflation out of the equation by using today’s dollars and a “real” investment return after inflation of 7 percent.

A 43-year-old dentist who is starting from scratch and tries to accumulate $2.8 million in 20 years, at age 63 requires a savings of $68,300 per year at a real inflation-adjusted return of 7 percent. This amount of savings equates to nearly 25 percent, not 10 percent, of the dentist’s current income of $280,000.

So, using these assumptions, saving 10 percent is not nearly enough. It’s probably only 40 percent of “enough.” By starting five years earlier, at age 38, the savings amount drops from $68,300 to $44,269 a year. This amount is closer to 15 percent of income. So saving 10 percent is not enough even if a dentist starts saving at 38 years of age.

Here is what I recommend for you and your financial advisor: You need to make hard decisions in your individual situation. Determine what is a realistic investment return. Should you count the value of your dental practice in the equation (it was not accounted for in the above examples)? Then you should determine your exact annual savings goal, not a rule of thumb. Don’t wait until you are over 50 to address these savings calculations!

Brian Hufford, CPA, CFP®, is president of Hufford Financial Advisors, LLC, an independent, fee-only planning firm that helps dentists achieve financial peace of mind. Upcoming Hufford Financial Advisors’ Financial Breakthrough Workshop dates and locations are listed at 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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