by Brian Hufford, CPA, CFP
Welcome to the New Dentist! This new section will appear in Dental Economics® every month with information that is aimed at the dentist who graduated from dental school less than 10 years ago. We will bring you the success stories along with the steps that led to that success. Our intent in this section is to keep you abreast of the opportunities that exist in the dental marketplace along with the information that you need to make right decisions for the way you want to practice dentistry. As always, we welcome your comments and suggestions to make this new section the best it can be for you! - Dr. Joe Blaes, Editor
One of the things that attracted me to a financial advisory career was the chance to observe wealthy clients and learn from their example. I’m sure in my younger years I expected those wealthy clients would possess business or investment secrets that I could implement in my own life. And they did have secrets! They just weren’t the secrets I expected.
A billionaire tells all?
Along the way it feels like I’ve read nearly every “billionaire-tells-all” book ever written, as have my young dental clients. I owned four houses and 34 duplex units during the no-money-down-path-to-riches craze in real estate. I formed my own oil drilling partnership when the price of oil hit the unheard of price of $40 per barrel in the early 1980s. I did all this before age 32. What motivated me in my early 30s was finding the secret to rapid wealth, or at least large wealth. What I wasn’t paying attention to in my 30s were the habits of my clients in their 50s who had achieved wealth using exceptional wisdom in their careers over a lifetime. Perhaps as a young professional, I didn’t think there was such a thing as achieving wealth by applying wisdom in a professional career. Or perhaps I didn’t think I could achieve enough wealth to consider this wisdom a “secret.”
In this article, I want to share two paths to wealth during your dental career, applying what I have learned over the past 30 years by observing how the wealthiest dentists manage their money. One path is rapid accumulation over 12 to 15 years, and the other is slow but steady accumulation over a career. I have met dentists who became wealthy quickly in the stock market, by owning restaurants, and by owning real estate. I once met a doctor who turned an investment of less than $50,000 into $12 million in the stock market. The trouble was he had no idea how to replicate that good fortune in other stock investments. For every doctor I know who has hit it big in a short time, I know 100 other doctors who have lost fortunes trying to accomplish rapid wealth through investment or business secrets. I have learned that one of the surest ways to poverty is trying to achieve rapid wealth.
It’s all about strategy, not tactics
Most financial publications are all about tactics. You know what I mean by tactics.
“Which mutual funds to buy in 2007.” “How to deduct all of your family vacations.” “Marketing secret brings in 30 new patients per month.” Tactics are about maneuvers, doing a certain activity one way instead of another, or purchasing this mutual fund instead of that one. It’s not that financial tactics aren’t helpful. It’s that tactics rarely are the key to accumulating wealth. You can master every investment and tax tactic available and still end your career without the ability to retire. Sound extreme?
Wealthy dentists are not driven by tactics. While they are tax conscious and investment literate, their focus is more strategic. By strategic, I mean that wealthy dentists in their 50s have gotten wealthy by having a goal, and then aligning their activities to maximize progress toward that goal, every single year. This is a much different mindset than purchasing a new piece of equipment at year-end so that it can be expensed off your taxes. A strategic mindset is “I need $5 million to retire at 57, which requires that I save $63,500 per year. How do I balance my spending, taxes, debt repayment, equipment purchases and fun so that this savings happens? What tools can I use to improve my ability to achieve these goals?” A strategic focus is more about aligning and balancing priorities with wisdom than it is about tactical maneuvers in investments and taxes.
Strategic Wealth Path No. 1 - Retire in 12 to 15 years from scratch
Many of our female dental clients find rapid retirement very attractive. The thought of full retirement at age 42 to 45 can be a reason for a little sacrifice to make it happen. When I say that rapid retirement is worthy of sacrifice, I’m not talking about working 5.5 days or even working harder at all. I’m talking about possibly forgoing some lifestyle spending goals. To achieve rapid wealth in dentistry you need to save 15 percent of gross production. If you have an $800,000 practice, this means you should save $120,000 per year. Sounds impossible, doesn’t it?
It’s time for some dental economics. I’ll start with macro and then get to micro. In general dentistry the basic macro-economic equation is 100 percent production - 65 percent overhead and 35 percent profit. The 35 percent profit is typically divided 5 percent pension and owner fringes, 10 percent taxes, and 20 percent spending at home. Most young dentists, if they are saving at all, save between 2 and 3 percent of gross production, and that is usually in the 5 percent pension and fringes component. Typically, no other savings exist. Not only will saving 2 to 3 percent of gross production not gain you wealth rapidly, it won’t allow you to retire at all, unless you intend to practice until age 70.
The biggest breakthrough in my career while advising my dental clients came from thinking strategically about their ability to create wealth rapidly. Until this breakthrough, it always seemed that wealth in dentistry was about making more or spending less. These solutions weren’t going to make me a popular wealth advisor; in fact, they might put me in the same category as mothers-in-law.
I began to think about dentists’ five spending priorities:
- lifestyle and taxes
- debt
- equipment and capital expenditures
- retirement savings
- legacy goals (such as college savings, etc.).
The breakthrough for me was finding innovative strategies that greatly increased saving for retirement and legacy goals by properly managing debt and equipment purchases, and properly aligning all five priorities. Debt payments and equipment purchases in a practice (without office building debt) average about 8 percent of production. For younger dentists, debt payments for purchasing a practice, a home mortgage, student loans and auto and other debt payments can consume as much as 25 percent of production. Without properly managing this debt and future capital expenditures like equipment, autos, and office remodeling, many dentists will reach 50 before they are able to save a significant amount.
Your strategic wealth plan should include a detailed strategy for the five priorities, where ideally all debt payments, practice and personal and capital expenditures don’t consume more than 10 percent of production per year. Properly structuring existing debt with longer payment schedules should free approximately 10 percent of gross production for savings. You can’t afford to lose 15 years of compound growth in savings by repaying debt first and then beginning to save at age 50.
Strategic Wealth Path No. 2 - Retire in 20 to 25 years, steady and strong
Ask yourself how you will define financial success for 2007. Do you define success by the amount of income or your ability to implement a whole complement of tax saving strategies? Scrap all that. Use one factor to define financial success: the amount of permanent savings. If you are unable to save 10 percent of gross production in 2007 (I want to be tactful here) you are a failure as your family’s money manager. To begin progressing on the path to financial success, you need to ruthlessly track spending in each of the five priorities and assure that all are aligned so that you can free 10 percent of production for savings. Waiting just five more years to get your act together and start saving from age 35 to 40 can cost you $3 million at age 60, due to forfeiting the most critical years of saving.
Finally, you need to have advisors who specialize in designing retirement plans for dental practices. This is one tactical area where the results are very strategic because you are saving in a deductible environment with tax-deferred growth. By employing a spouse in a practice with a well-designed 401(k) plan, you should be able to save approximately $60,000 in a deductible environment with low staff costs. The strategic part of plan design is assuring that staff costs are reasonable.
What will the 62-year-old you have to say about money management? Did you address these issues when you were young, when it really mattered? Or did you allow the sound and fury of your younger years to distract you from addressing the issues until you were 50?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 www.huffordfinancial.com. 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].
