What retirement...when?

April 1, 2006
In most cases a combination of the options explored in this article can provide a comfortable future for you.

In most cases a combination of the options explored in this article can provide a comfortable future for you.

Planning early for retirement is one of the keys to a successful transition into a relaxed life in the “later years.” But, all too often, dental professionals do not plan early enough, limiting their choices. Recent ADA figures indicate only 6 percent of dentists in America today can comfortably retire at age 60. Are you part of the other 94 percent? Planning early and often can relieve much of the stress and worry of retirement.

“Retirement plan? I am going to sell my practice to retire.” That’s what dentists used to say when asked about retirement. But by now, most have come to realize that the dream of selling a lucrative practice and living off the proceeds for life is much less likely to happen in the coming years. A continued decrease in the graduation rates from dental schools - coupled with an increasing pool of current professionals looking for their retirement opportunity - has made this option much more difficult.

Alternatively, you may want to consider bringing on a partner or associate for your current practice, or perhaps sell and become an associate to the new owner. Each of these alternatives has significant benefits and drawbacks to consider.

Partnership

There are many advantages to taking on a partner in a practice. David Gage, author of “The Partnership Charter: How to Start Out Right With Your New Partnership {or Fix the One You’re In},” lists some of the benefits:

Your partner shares the burdens and responsibilities.

Someone else can do jobs that don’t play to your strengths or interests.

Partnership affords opportunities that otherwise might be beyond your grasp, including greater success.

You can move faster to take advantage of new opportunities.

You can enjoy camaraderie with an equal, instead of feeling alone at the top.

There is the potential for synergy and better decision-making at the very top of the practice.

One more worthy concept - it’s nice to go on vacation or be out of the office for a few weeks, knowing your practice is still operating in a (presumably) profitable mode.

What about the downside of a partnership? Quoting an Inc. magazine poll, Gage notes “inevitable conflicts” and “unmet expectations” as the two most common reasons business partnerships are unsuccessful. It’s difficult to merge people who have been comfortable making all of their own decisions and have it work smoothly. Hiring an associate relieves much of this pressure, and leaves the decision-making with the hiring dentist. However, this course of action also shortens the benefits considerably.

Bring on an associate

It sounds simple enough. Hire a young, hungry associate and work him or her hard. This would allow for more “free” time and possibly offer the same benefits as a partnership. Right? It probably isn’t going to be as easy as it sounds. The lack of new graduates from dental school, relative to the number of dentists hoping to retire, makes it even more difficult to arrange for a successful, lasting relationship with an associate. Upping the stakes by offering a piece of the business in return for a successful tenure as an associate can help attract a candidate ... but this sounds a lot like a partnership.

Becoming an associate

With the laws of supply and demand expected to continue driving the value of a practice lower during coming years, some practice brokers are promoting the idea of selling your practice now and becoming an associate. In theory, the selling doctor could make a comparable amount of income from the buyer.

Does it sound too good to be true? Consider some of the potential problems with this view. The new owner can only afford to pay a limited salary when working with a finite amount of revenue and still hope to cover the debt service required to purchase the practice (not to mention the possible obligation of large loans from dental school). If the practice is not likely to experience significant growth (in volume or in profit margin through performing “high-end” procedures), it probably does not make sense to bring on an additional dentist (and an additional salary).

Some other aspects to consider. Are you really associate material? There are some serious issues involved. You may have trouble accommodating the buyer after spending your professional career building your practice. Are you mentally prepared to be an associate in the practice you worked to create? Are you willing to let someone else dictate your schedule and tell you how he or she will be running the “new” practice? Who will determine which patients you see? When was the last time you were employed by someone else and how did you feel about it?

Alternatively, metropolitan dentists may wish to consider selling to a reputable Dental Management Service Organization (or DMSO), and then negotiate a favorable employment contract (see “Have your cake ... and eat it, too!” in the June 2004 issue of Dental Economics®).

Transition the practice

Interest from baby boomers and reality TV shows has been driving an increase in the demand for cosmetic procedures, and these procedures offer increased margins for practitioners who are willing to make the change. Xana A. Winans, president of Golden Proportions Marketing, a firm specializing in niche practice marketing, has experienced considerable growth in her base of specialty dentists looking to market their practices. “There is a significant up front cost to convert a practice from a typical family practice to a high-end specialty practice. It also makes the practice much more difficult to sell (as a specialty practice),” notes Winans, “but the opportunity for a significant jump in revenue has driven our clientele to make the necessary changes.”

Be careful not to underestimate the commitment to this transition. It can be financially and mentally difficult for many dentists to take on this significant obligation of resources and time. Nevertheless, a successful transition could lead to a considerable increase in cash flow. This strategy, combined with aggressively funding some of the more generous retirement plans, can lead to a more comfortable retirement.

Savings and investment

Since dreams of early retirement for many people were shattered by the stock market’s volatility in recent years, this may not seem like an enticing option. Consider, however, that the 10-year average return for the S&P 500 is still around 12 percent. In light of the alternatives, current long-term prospects for the “markets” still look favorable, although past performance is no guarantee of future results.

Serious consideration should be given to the additional advantages of the current tax savings on pretax retirement plans and the opportunity to make regular, systematic investments which can reduce the overall volatility of your portfolio (and actually allow you to benefit from volatile markets). Traditional pretax retirement plans available today allow more than $40,000 per year of pretax contributions for certain individuals. Additional “catch-up” contributions for employees age 50 or older also are allowed. Keep in mind that an individual in a 35 percent combined state and local tax bracket also would be reducing his or her potential tax bite each year by about $14,000. (Of course, the money will be taxed when it is withdrawn from the retirement account.) Recent changes in the tax laws allow for specialized “Safe Harbor” 401(k) plans, combined with New Comparability profit-sharing plans, to limit the amount of the contributions made on behalf of your employees. Even if stock and bond returns remain below their historical average, there are benefits to saving current tax dollars.

If you don’t have as much time to allow compound interest to work, you may need to consider more aggressive “defined benefit” plans. These plans allow for significantly more money to be saved for individuals age 50 or older. They use a “reverse engineering” approach and consider how much money you need to contribute annually to provide a reasonable income for retirement. Older individuals with higher current income receive the greatest current qualified contribution.

Defined benefit plans require actuarial calculations, a commitment of continued contributions, and do not offer the flexibility associated with 401(k) and profit-sharing plans. Be aware of one particular caution with defined-benefit plans. If the value of the assets in the plan drops due to poor investment performance, the plan may require even higher contributions to make up for the shortfall in funding the future benefit. Be sure to consult your tax professional and a retirement-planning specialist before committing to any type of retirement plan.

The best alternative?

There is no simple answer for everyone. Many of the questions that arise when pondering your options can only be answered by you. Having a written plan for your situation that addresses your specific needs is the best way to approach your future. You must consider all of your desires, goals, and values in truly designing this plan. Roy Disney (Walt Disney’s brother) said, “When your values are clear, your decisions are easy.”

Work with people you trust to design a plan for your future ... one with serious goals to which you are willing to commit. Be honest with yourself. “Values-Based Financial Planning, The Art of Creating an Inspiring Financial Strategy,” by author and coach Bill Bachrach, is a quick read and offers step-by-step processes for “do-it-yourselfers,” and gives “delegators” tips for finding a trusted advisor.

In most cases, a combination of the options explored in this article can provide a comfortable future for you, once you have determined what is really important to you (your values). How badly do you want it? The ball is in your court!

T. Michael Hall is first vice president/investments with the brokerage firm of Janney Montgomery Scott LLC. A Chartered Retirement Plans Specialist (College of Financial Planning, CRPS), his practice focuses on comprehensive financial and retirement planning for small business owners and medical and dental professionals. For more information or to arrange a consultation, e-mail him at [email protected], call (800) 652-6639, or fax (570) 326-7523.

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