Brian Hufford, CPA, CFP
It has been a little more than eight years since we, along with the Academy of General Dentistry, completed the first-ever scientific survey of the retirement preparedness of general dentists. What we learned from the survey was that 15% of dentists were on track for achieving their retirement goal without considering practice value and 30% of dentists were on track to meet their goal with practice value included.
What I took from the survey was that, if I had to guess how much savings an average dentist would accumulate at age 60 (excluding practice value), it would be approximately five times current earnings. In other words, if income from your practice currently is $250,000, my guess at your average savings at age 60 would be five times that amount, or $1.25 million. I extrapolated this multiple from the savings that dentists as a whole reported accumulating.
Even more interesting, however, is the small handful of dentists who had accumulated five times as much wealth, or $6 million using our example, with the same income. What did these dentists do differently from their peers? On the fringes of this group were some who had accumulated much more wealth through real estate investing or entrepreneurial ventures, but as many or more survey respondents were likely hurt by these same activities. I wanted to focus on behavior common to the group of exceptional savers that all dentists could replicate simply by better managing the income from their practices. My five conclusions are as follows.
1. Create a lifetime of simplicity and savings. The average savings for dentists is only about 5% of income over a 30-year career. While dentists typically save a lot more after age 50, average savings equate to only about 5% of an entire career's worth of income. The attitude of most dentists seems to be "Make as much as I can, spend as much as I can, and save what's left over." Prodigious wealth accumulators save an average of 25% of income throughout their careers.
2. Eliminate debt, but not at the expense of saving. While prodigious wealth accumulators were surely debt averse, they didn't adopt an approach in which they waited to save in order to eliminate debt first. The current myth is that the surest investment return is the one obtained from eliminating interest on debt payments. The high savers didn't ascribe to this myth. Their primary focus was on saving, by paying debt a little more slowly, rather than waiting until all debt was eliminated to begin saving.
3. Always know where all your money goes. The high savers all seemed to have simple but effective methods to track spending and knew the effects on cash flow from unexpected costs (such as an office remodel or a large equipment purchase). This intimate knowledge and tracking of their cash flow helped to protect savings from unexpected cash requirements, since they were filtered through a lens that put savings first.
4. Restrain excesses that sabotage peace of mind. The big difference between low savers and prodigious savers seemed to be excessive spending in one or more of three primary areas: real estate, children, and hobbies. The lowest savers tended to have very expensive homes or second homes, expensive children, and hobbies that included flying or sailing. It's not that prodigious savers don't have nice homes, college tuition costs, and hobbies. It's just that expenditures sabotaging wealth creation didn't seem evident.
5. Tax liabilities are managed, not manipulated. Some low savers seemed to have a nearly obsessive need to eliminate all income taxes. Financial decisions were motivated first by tax effects and last by the ability to create wealth. While section 179 expensing is a great tax benefit to dentistry, sometimes I fear that it is also one of the greatest wealth destroyers of all time. Many dentists seem to believe that it is mandatory to purchase equipment every year in December as a way to ramp up expensing. High savers, on the other hand, seem to have a greater sense of the overall return on a given capital expenditure compared to mere spending to save taxes. At the highest end of the wealth-destruction spectrum were dentists who used exotic tax schemes proffered by tax "gurus" who charged exorbitant fees for "insider" expertise.
I was initially worried that readers might infer a better headline for this article would be "Boring dentists create wealth." Quite the contrary, wealth is created by wisdom and restraint. Prodigious wealth is created by a lifetime of intention and management.
Brian Hufford, CPA, CFP, is a wealth advisor and dental practice thought leader with Buckingham Advisors, a national independent wealth and financial advisory firm with a specialty in helping dentists achieve their most important goals. To connect with Brian and Buckingham, visit BuckinghamAdvisor.com, call (866) 545-8816, or email firstname.lastname@example.org.