By Brian Hufford, CPA, CFP®
While listening to Bob Dylan’s When You Gonna Wake Up? on a recent weekend drive, I was struck by the “too-worthless-to-be-sold” lyric. At the risk of having counterfeit philosophies polluting my thoughts, I thought about a revelation I had recently concerning dentists’ perceptions of their career financial legacy.
Which of the following do you think gives dentists the most confidence for their financial future — 1) their annual savings, 2) their holdings in stocks and bonds, or 3) realizing the maximum future value of their dental practice and office building?
In the past few months, I have been shocked to learn that dentists have the most confidence in the value of their practices and office buildings when pursuing a retirement goal. I learned this from informal individual retirement confidence surveys that our firm conducts regularly.
I asked myself what it is about a dentist’s practice and office building that inspires financial confidence more than holding a diversified stock portfolio of an equal value of large companies such as McDonald’s, American Express, and Walmart? What is it about a dental office building in Terre Haute, Ind., that inspires so much confidence for retirement that a dentist would leverage it at nearly 100% and spend a career paying off the debt, with the belief that the realized value from sale or rental could provide a confident retirement?
Perhaps the obvious answer is the fact that dentists derive their financial confidence from their professional skills, and they are confident that buyers will ultimately line up to experience the same success their practice and location gave them. To quote Bob Dylan’s lyrics again — “You’ve got some big dreams, baby, but in order to dream, you gotta still be asleep.”
Dental practices and office buildings are valuable assets. But they break several rules of successful investing, primarily a lack of diversification and a lack of liquidity. To remedy this problem, our firm recommends the following steps:
1. Don’t depend on the value of your practice and office building as retirement assets. You likely will realize value from your practice and office building, but plan to retire from savings and liquid investments. This advances two important habits — learning to save and learning to invest. It fosters the important principle of diversification.
2. Don’t pay debt so quickly that you sabotage your ability to save 20% of income. Having a singular goal of becoming debt-free is toxic to financial freedom. You should have dual goals of saving 20% of income while eliminating debt more slowly. This is a safer way to retire debt and benefits from the principles of compound growth.
3. Don’t allow expensive children to interrupt retirement savings. One of the largest late-career problems with continuing a savings plan is expensive adult children and costs for college tuition, weddings, etc. Always have savings as a primary goal. If necessary, use student loans for college costs so that savings are not interrupted. This sounds radical and perhaps even unfeeling, but your kids will always be okay if you are okay.
4. Use large deductible pension plans for the second half of your career to ramp up retirement assets. Under current pension law, most dentists older than 45 can save and deduct more than $150,000 per year in 401(k)/cash balance-paired plan arrangements. With a combined tax savings of 40% in federal and state income taxes, large plan contributions later in a career are a great way to diversify and provide liquidity.
5. Be realistic about investment opportunity and risk. With the uncertainty in today’s economy, dentists somehow cling to a belief that the investment in a dental practice and office building are safer than a globally diversified portfolio of stocks, real estate, and bonds. This is demonstrably false due to the principles of diversification and liquidity, yet dentists put confidence in the future value of practice assets. It is critical to change this belief to foster significant savings to replace working income.
In summary, you cannot take it with you when you go. Your dental practice assets have helped you produce a great working income. Do not depend on them when you can no longer practice.
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. Contact Hufford at (888) 470-3064 or [email protected].
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