by Brian Hufford, CPA, CFP®
With a strange sense of irony, I am writing this article at an age I could be retired. I could be on a beautiful sunny beach that would be a perfect 85-degree vision of happily fading into the sunset of my life. The irony is that while lying in the sun recently, my wife and I reflected that we never believed we would be this old. In addition, permanent vacation is not as appealing a retirement vision as we might have imagined at 35 years of age.
So, why did I sacrifice all of those beach vacations in my 30s and 40s to save for this point in my life? What has all this sacrifice and saving earned me at this point? Perhaps, having been blessed to live this long and having saved to replace my working income, I now at least have the freedom to decide what comes next each and every day.
There are five reasons that would prevent me from ever having a choice to retire and five obstacles you must overcome, too:
Reason 1 – You have not created or implemented a retirement income plan.
If I had a nickel for every 60-year-old dentist who wished he or she had been more serious about planning for retirement, I never would have had to save for my retirement. It almost seems like our culture still has not received the message that General Motors will no longer fund your retirement.
What I have come to believe to be the surest sign of a failed future retirement dream is a 40-year-old dentist who is certain that next year it will be easier to save. If you do not know this year what your goal-savings needed is at age 65, nor exactly how much annual savings is required to get there, then you do not have a retirement income plan.
Reason 2 – You do not know your retirement glide path.
I have a quick rule of thumb to quickly gauge the slope of a dentist's glide path to a successful retirement landing. For $100,000 of retirement income needed at age 65, a dentist should have approximate savings of $400,000 at age 45, $700,000 at age 50, $1.2 million at age 55, $1.8 million at age 60, and $2.5 million at age 65. This would be combined amounts in retirement plans and personal savings. I simply slide the scale up for an increased retirement income need. If a dentist needed $200,000 of retirement income, the savings goal at age 55 would be $2.4 million instead of $1.2 million. If you are behind, better run faster.
Reason 3 – You are not fully using tax-deductible retirement plans.
If you own your practice, you should be saving – at a minimum – the lesser of 25% of your earnings or $51,000 in a 401(k) plan. You should have a study performed to save even more with a paired 401(k)/cash balance plan, which can boost tax-deductible savings to more than $100,000. With the much higher income tax rates for future years, these plans offer nearly a 50% match in income taxes saved. Why would you not save as much as possible with a 50% match?
Reason 4 – You have not aligned your investment strategy with your retirement goal.
What investment return is required, based upon your current savings, to achieve your retirement income goal? Is it 5%, 6%, 7%, 8%, or more? Do you approach an investment strategy with a rigorous, evidence-based method of diversification and allocation between risk assets and riskless assets (stocks versus bonds)? We find that most dentists' investment portfolios are not in alignment with their retirement goals. Most are taking too much investment risk. But many, because of 2008, are taking too little risk to align a strategy with their retirement goal.
Reason 5 – You do not have a practice transition plan.
Selling a dental practice is much more involved than selling your home. Selling a home is a matter of listing it and waiting for a buyer with the best offer. Selling a dental practice typically does not work that way any longer. These days, most dentists have to consider very nontraditional methods of finding the best transition match for themselves and for patients. Most of the current options for realizing the value of your dental practice require beginning the journey at least three years in advance of retirement.
In summary, there are five reasons that you will not be able to retire. You will invest the time and leadership necessary to overcome them all.
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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