Dr. Pride`s article on funding one`s retirement misleads the average dentist to think that the maximum contributions to a pension plan must be made to become wealthy at age 65. The best advice would be to put as much money as you can into your plan in the earliest years of your working career. Assuming you begin working at age 27, these dollars, through the magic of compounding, will produce tremendous returns with time.
Also, his assumption of a 13 percent return has no basis. The stock market has a historical average of 11 percent over the last 70 years, while the bond market has returned 5 to 6 percent.
Another way to increase your retirement account is to have your wife as an employee and contribute to her account. Also, a nondeductible IRA is sound retirement advice. The most important advice is proper asset allocation of your investments, along with investment in index funds. In the long run, index funds assuredly will give you the greatest return on your stock and bond investments. I close by asking my colleagues if any of them really spend one to two hours on a new-patient examination, as suggested by Dr. Pride?
Kenneth Tobin, DMD
Union City, NJ
Dr. Pride responds: Dr. Tobin is correct to assume that one will gain a significant sum on which to retire if one religiously funds a retirement plan from a very young age, such as 27. And he is correct that the "magic" of compounding interest is what makes early contributions snowball into fully funded pension plans. Unfortunately, very few dentists fund their pension at age 27. In fact, less than 6 percent of dentists in America fully fund their pension plans.
Therefore, if these dentists want to retire at some point, while maintaining their current lifestyles, they have little or no choice but to maximize their pension contributions. If we assume that a blended fund of 50 percent stocks and 50 percent bonds will yield an 8 percent return, and if we assume that a 40-year-old is counting on an 8 percent return to replace his or her current income (with inflation) by age 65, this individual would need to be saving 40 percent of his or her pretax income, which, by anyone`s standards, is virtually impossible.
There is indeed basis for the 13 percent investment return. While Dr. Tobin is correct that the stock market has a historical average since 1926 of roughly 11 percent, we know numerous investors - many dentists among them - who beat the market significantly. There are investment managers available who have produced, over the last 20 years or more and in all types of investment climates, historical returns in excess of the unmanaged stock index fund. The issue becomes finding those managers and monitoring their performance.
Brian Hufford, acclaimed CPA and CFP, whose program our dentists use to further their investments, counsels caution when employing your spouse to further increase pension contributions. Let`s assume the wife, who is the dentist in this case, has a $150,000 income and pays her spouse $50,000. The FICA taxes on the $50,000 are 6.2 percent (Medicare is not factored into this percentage) plus the employer portion of 6.2 percent, for a total of 12.4 percent. If we assume the spouse has a 15-percent-of-pay profit-sharing plan, we multiply the $50,000 by 15 percent to get a deductible contribution of $7,500 for the spouse in the profit-sharing plan. Assuming this couple is in a combined federal and state tax bracket of 40 percent, this pension contribution saves them $3,000 in taxes.
But this tax savings comes with a price because they had to pay $6,200 in FICA to save $3,000! That`s not a great tradeoff. It is clear that unless the spouse can be paid at a level that will far exceed the FICA limit, this is not a winning formula. Similarly, don`t worry about making a $2,000 nondeductible IRA contribution if you are not contributing a full $30,000 per year to a deductible pension plan. While better than nothing, the $2,000 contribution is not going to allow you to come close to retiring at your current lifestyle.
That brings us to Dr. Tobin`s last question about one- to two-hour new-patient examinations. It is true that while more than half of the dentists in America spend just 20 to 30 minutes on the initial examinations, that doesn`t make it right.
The Pankey Institute has been teaching a one-and-a-half-hour new-patient exam for more than 25 years, as have other clinical educators such as Dr. Pete Dawson and Dr. Frank Spear. But for us at Pride Institute, the proof is in the pudding. Our clients are taught to perform a comprehensive, ethical exam that typically takes one to one-and-a-half hours, with specific verbal skills, charting, and patient interactions.
The end results are patients who perceive quality and caring and accept more needed dentistry - often more than that which is covered by their insurance. Patients win, the practice wins, and the dentist can happily fund a retirement plan - in the end reaping the hard-earned rewards of a profitable dental career. If you`re not sure how to go about attaining these kinds of results for yourself, call Pride Institute at 1-800-925-2600.
