To the dentist:
As a dentist, you contribute greatly to the overall health and well-being of your community. Don’t forget your hard-working staff. You probably have an employee benefit - the 401(k) plan - which is underutilized and underappreciated by your staff. It is up to you, as the leader of your practice, to remedy this situation. You attend numerous financial seminars and know the importance of starting to save early. Give your staff the benefit of your knowledge and financial expertise.
To the dental staff:
The start of the 21st century has witnessed the frightening end of the corporate welfare state. During most of the second half of the 20th century, employees of large corporations had it made. As long as you worked hard, kept your head down, and stayed at the same company for 30 to 40 years, you could count on being provided a comfortable retirement. Those days are over. Today, large companies are shedding employee benefits quicker than they are downsizing employees. Now most employees need to plan and fund a good part of their own retirement.
The good news is that your doctor has an incredible employee benefit, a 401(k) plan, which may not even be on your radar screen. This article is intended to help you add perhaps hundreds of thousands of dollars of wealth to your retirement savings during your working years.
Own your own business in your doctor’s practice
With a little analysis, you will see that the 401(k) plan is really like having the opportunity to own a business in your doctor’s practice. People start their businesses to achieve the high returns of “sweat equity.” Your doctor’s 401(k) plan offers higher returns than nearly any small business, even if the investments do not perform every year. How is this true? For each dollar that you contribute, the federal and state taxing authorities contribute somewhere between 25 to 40 percent through tax dollars saved. So, for each $1,000 that you save, it only costs typically $600 to $750 since the amount saved in the plan is deductible. Although the government doesn’t contribute to the plan, they do contribute through tax savings. This allows you to save more.
Most dental 401(k) plans have a “safe-harbor match,” and possibly a “profit-sharing” feature. Most dentists contribute, on average, between 3 to 10 percent of an employee’s wages. This typically occurs whether or not you contribute to your savings.
When you combine your tax savings and your doctor’s contributions, the bottom line is that - by offering a 401(k) plan - your doctor is in effect offering you a high-return opportunity. With this opportunity, each dollar you contribute receives as much as a 50 percent return in the year of contribution - even before any investment returns. What small business startup can offer these returns?
Payroll for life
Right now you work hard for each dollar of payroll you receive, and each dollar already may be committed to living expenses. It may seem impossible to find money to save. Your younger years, when saving is the hardest, are the most important years to find money to save. For illustration, let’s assume that you are able to achieve a 10 percent investment return over the long term, and your savings increases by inflation each year. (Of course, no one can guarantee investment returns or that losses won’t occur.) With these assumptions, 30 years of compound growth would increase each $1 that you save to approximately $240. This means that - if you save $2,000 per year from age 30 to age 60, and increase the savings each year by the rate of inflation - you would accumulate approximately $480,000. If you wait just five years until age 35 to start saving, the accumulation - at age 60 - drops to only $240,000. If you wait 10 years until age 40 to start saving, the accumulation falls to $120,000. In this example, waiting just 10 years to start saving costs $360,000. So the principles of compound growth dictate that early saving is very important. You need to start saving right now!
Ultimately, your 401(k) plan savings will become “payroll for life” for you. You are funding an account that will give you the best opportunity possible to enjoy a monthly payroll at retirement for the rest of your life.
Your doctor cares for your future well-being. With a little planning, you can find extra dollars to save in the practice’s 401(k) plan. Don’t let a single year go by without taking advantage of this incredible opportunity.
Brian Hufford, CPA, CFP®, is president of Hufford Financial Advisors, LLC, an independent, fee-only planning firm that helps dentists achieve financial peace of mind. Upcoming Hufford Financial Advisors’ Financial Breakthrough Workshop dates and locations are listed at www.huffordfinancial.com. The company is recognized as the only strategic alliance partner for financial planning services for the Academy of General Dentistry. Contact Hufford at (888) 470-3064, or at email@example.com.