QI’m 36 and single with $50,000 saved. My advisor says I need to save more for retirement than my current $15,000 a year. First of all, how? My schedule is already full, and I still don’t have any extra cash to invest. I have a very modest lifestyle (1950s two-bedroom tract home near Long Beach, Calif., generic car), and the last real vacation I took was before I bought this practice. Second, why do I need so much more in retirement? I want to enjoy life now while I can, not save it all for “someday” when I may not be healthy enough to enjoy it.
A Your advisor may sense your frustration and is trying to help you have more financial options in retirement than you do now. However, the answer to your second question is that you’re probably not saving enough to sustain even your current modest lifestyle in retirement. At your current saving rate, assuming you’re earning about 8 percent a year (easily possible but still more than the average investor earns) and guessing you’re spending about $75,000 a year (less than most dentists), you’d be able to retire at age 65 and have enough to last to age 82.1 Even if you sold your practice at age 65 for $500,000, that would only give you until age 88. Since the average life expectancy is 90, you would need to work longer or save more. And, you may not want to have to work until age 65.
But your advisor is doing all he can on his end – he can only work with the money you have to invest. The answer to your first question, “how,” is your practice. Your practice is the financial engine that drives your prosperity, both now and in retirement, and that’s where you need to turn your attention.
Any kind of business can have inefficiencies that create gaps through which profit leaks out. The unexamined practice has more than most. Each gap represents untapped earning potential. Close enough gaps, and your cash flow can be much stronger.
Even though your schedule is full, there may be ways to make your full calendar more efficient and profitable using better scheduling, better diagnosing, and/or better patient education. Or perhaps it’s collection or overhead that needs help. Are your fees appropriate? Do you have the right staff in the right positions? Are you and your staff working toward the right goals? Are you sending patients the right messages?
Once you start looking, a good practice consultant should be able to find immediate opportunities to boost your cash flow while you tackle the issues that will take longer to improve.
Your advisor can help you integrate additional income into your financial plan to boost both your current lifestyle and your savings. You’re young enough that saving just $10,000 a year more would allow you to spend over $5,000 a year more – now and through age 90 – or to retire a couple of years earlier.
It’s not unusual at all for a good practice consultant to find substantial gaps in the first year or two. With an extra $50,000 after tax to work with, you can bring your annual spending up to $94,000 (adding $19,000), fully fund your profit-sharing plan ($46,000 limit this year), and retire in about 10 years at the same lifestyle. Or you can bring your annual spending up to $102,000, save $38,000 a year, and retire at age 62. Other options: college savings, expanding the practice, or more time off – a world of choices you don’t have now (and all the more reason you will need an advisor to sort out your choices).
The unspoken question crackling within your message is, “How long can I live under this pressure before I burn out?” The way to depressurize is to first give yourself the resources – time and money – to have choices. Then, it’s up to you and your advisor to determine which choices will give you the most personal fulfillment.
You’re absolutely right that you should enjoy today as well as tomorrow, but today doesn’t fall into our laps. It takes both practice and financial planning to seize today the way we want and prepare for tomorrow.
1Calculations assume 3 percent inflation, 7 percent earnings after retirement.
Gene Dongieux is the author of If You Have It Made, Don’t Risk It: A Physician’s and Dentist’s Guide to Investing. As chief investment officer for Mercer Advisors, he manages over $3 billion in client assets. Dongieux has been quoted in “The Wall Street Journal” and “Investment Advisor” magazine. Contact him at [email protected].
