by Brian Hufford, CPA, CFP
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Economic winter is upon us and new strategies are necessary to realize career and retirement goals. This column is intended to lure you out from hiding under your desk so you can explore proactive steps to get back on track. Difficult times bring out the best in those who refuse to allow obstacles to destroy their dreams.
Invest in yourself. Difficult times call for the development of exceptional business, relationship and leadership skills. During the debt-bubble years, patients enjoyed an economic reality of having it all. Barriers to treatment acceptance were minimal. Home equity lines offered on ever-increasing home values promised an unlimited source of money.
But now the easy money is gone for the foreseeable future. The days of frugality, necessities, and pay-as-you-go have returned. Excellent clinical dentistry is a necessity and demographics favor your practice success, but you must invest in acquiring the best relationship skills for case presentation, marketing, and staff leadership.
Corporate dentistry invests much money in practice management, leadership, and business management principles to create a profitable practice environment. You already have the trust of patients developed through your commitment to clinical excellence and patient care. You must make an ongoing large investment in yourself to overcome the current challenging economic environment. Stop asking dental suppliers about the woes of other practitioners. Treat any slowdown in your practice revenue as a sign of leadership deficiency. The definition of hope is a vision of a positive outcome with a plan of action that you know you can achieve. The operative words are "plan" and "action."
Save more. The current investment climate shouldn't cause you to stop saving and investing. The latest retirement plan described on the Internet is the 401-Keg Plan. The logic is that, if you invested $1,000 in General Motors stock a year ago, you would only have $167 remaining. But if you had purchased and consumed $1,000 of beer, then recycled the aluminum cans, they would have yielded $214.
The object of the 401-Keg Plan is to drink more and recycle. While a compelling argument, the plan has not been approved for tax deductible contributions. We are likely to be subjected to an unfavorable tax environment with future legislative initiatives. It is not unthinkable that the marginal tax brackets of dentists in private practice could reach beyond 50% with the load of income, Social Security, and state income tax law changes. Even if the unthinkable happens, it is doubtful that current deductible retirement plan arrangements will be curtailed. If anything, the current investment climate should cause legislators to continue a liberal attitude toward increasing deductible retirement plan contributions.
Currently, if you are in your 30s, you can contribute nearly $70,000 on a tax deductible basis to a 401(k) plan arrangement by employing your spouse and paying a W-2 wage of approximately $18,000. The 401(k) plan employs a cross-tested profit-sharing plan to yield the maximum amount allowable under defined contribution plan rules.
These plans allow your staff to deduct up to $15,500 from their salaries while keeping employer contributions reasonable. If you are in your 40s, 50s, or 60s, you may benefit from a paired-plan arrangement by adding a cash balance plan to greatly increase deductible savings. This paired-plan arrangement, a 401(k) and cash balance plan, will likely yield deductible savings in the range of $100,000 to $250,000. The amount of savings will depend on your age.
Finally, use your practice asset to support the best possible retirement, a great balance between working and leisure. Imagine a working environment in which you could take off 16 weeks per year in your 50s and then transition into more and more time off. Dentists in their late 50s and 60s are establishing group practice or merger arrangements in which part of the value of the practice is realized now and the balance upon final retirement.
This allows the leisure-minded dentist to realize as much as half of the practice value today with a buyer's commitment to pay the balance of the purchase later. The dentist may take a week off per month or work three or fewer days per week with time to pursue passions beyond dentistry. We think this transition model fits dentistry's current demographics.
Even in economically challenged communities, the ability of two practitioners to merge and reduce the overall overhead of two practices creates an environment for higher profitability and a better opportunity to transition the practice of an older dentist. It also lets the older dentist to stay connected to dentistry while gradually slowing down.
With some proactive planning, you may find that it is possible to recover from current investment challenges.
Brian Hufford, CPA, CFP®, is CEO of Hufford Financial Advisors, LLC, an independent, fee-only planning firm that helps dentists achieve financial peace of mind. Contact Hufford at (888) 470-3064, or at [email protected].
