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Why financial planning should be part of your practice

May 22, 2022
Sadly, many dentists find themselves ill prepared for retirement, and this is due entirely to a lack of planning. This doesn't have to happen to you if you start planning now.

As a leadership coach and proponent of fee-for-service dentistry, I strive to help dentists achieve independence from PPOs. There are countless reasons for dentists to drop PPOs, but the most justifiable one is the detrimental impact they have on your bottom line.

As much as dentistry has its intrinsic rewards, it is the bottom line that is the just reward. In my experiences helping dentists transform their practices, I’ve learned that most of them focus on the short game, that is, the day-to-day operation of their businesses, and give little thought to the end game, namely practice transition and retirement. Sadly, many dentists find themselves ill prepared for retirement, and this is due entirely to a lack of planning.

Here are the caveats I ask every dentist to incorporate into their preparations for the future.

Build a team of savvy business professionals.

At a bare minimum, this team should include a financial planner, accountant, and lawyer. While some dental schools have incorporated a degree of business education, most dentists graduate with little knowledge about how to run a practice. This knowledge is most often acquired through mentorship or trial and error. Experienced professionals can speed your learning process and avoid the pitfalls that can result from lack of knowledge. Business transactions such as purchasing a practice, hiring associates, forming partnerships, and practice transitions are just some of the significant business deals dentists may experience, and if not handled competently, these can have grave financial consequences. Retirement planning should be part of your practice business plan.

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Have a financial plan and stick to it

Although most dentists have a good understanding of basic financial management and investment strategies, many fall short of developing a plan that will guarantee they attain their financial goals. Financial planners/wealth managers are knowledgeable professionals who work in concert with accountants and/or pension advisors to tailor financial plans to meet your goals. Developing the plan is only part of the equation, and executing it is the other. Many dentists fall short of attaining their financial goals not because of poor planning, but due to their failure to adhere to their financial planner’s strategy.

It’s not what you make; it’s what you keep

There are countless practice management seminars that focus on increasing productivity, but increased productivity does not necessarily mean increased profits. It’s the bottom line that counts. In addition to focusing on maximizing profits in their practices, dentists should do the same with their retirement plans, especially when there are tax benefits.   

Review and revise your retirement strategy periodically

The financial world is dynamic. Market fluctuation and changes in tax laws are examples of what can have an impact. Investments that are favorable at one time may become unfavorable later. Periodic review of one’s portfolio is essential for maximizing growth and protecting losses. A dentist’s personal situation also needs to be assessed periodically and factored into financial planning.

Plan for your practice transition

A dental practice has value only if a buyer is willing to purchase it. Recent graduates facing overwhelming educational debt are less likely to take on an additional financial burden. Also, the fact that more dentists are retiring than entering the workforce makes the market less favorable for selling. Dentists who assume that the sale of their practice will be a major part of their retirement nest egg may have to settle for less than they had hoped, especially if the sale is on short notice due to illness or other unexpected circumstances. Developing a strategy for practice transition should be an integral part of retirement planning. One strategy is to hire an associate who will grow with the practice and possibly purchase it. Another might involve merging with other practices to form a group practice that has provisions for a buyout. There are many possible strategies, but the important thing is to plan in advance.

It’s never too late to start

The earlier you plan for retirement, the better. However, dentists often defer saving for retirement due to other financial obligations, the most notable being educational debt. Unfortunately, dentistry doesn’t offer the opportunity for a windfall, that is, the one deal that can be financially life-altering. Saving for retirement requires discipline and persistence, and the key is developing a plan and sticking with it.

Plan for the worst and hope for the best

Dentistry is a very demanding profession, both physically and mentally. Some dentists are able to work well into their later years and enjoy good health and prosperity. But things don’t always go as planned and there can be circumstances that cut a career short. That said, sound financial planning should incorporate a strategy that deals with the unexpected, such as business interruption and disability insurance. It’s always better to be proactive than reactive.

Every dental office should have a business plan and incorporated into that should be a financial plan with both short-term and long-term goals. Solid financial planning with the aid of a knowledgeable and experienced professional can help dentists attain financial success.

Editor's note: This article appeared in the May 2022 print edition of Dental Economics magazine. Dentists in North America are eligible for a complimentary print subscription. Sign up here.

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