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Rarely have there been more uncertain times for dentists planning for retirement. But you can create a plan that helps to identify and eliminate threats to retirement success. This will greatly increase your confidence and remove the threatening clouds of uncertainty.
When I attempt to give clients the best leadership in solving financial problems, I begin with the variables that must be controlled. The retirement problem has five variables: retirement date, retirement income, savings needed, investment return, and investment risk.
To increase retirement confidence, it is critical that these five variables are aligned with your confidence levels and with reality. This exercise begins with a ranking of the five retirement variables.
Quickly rank the five variables from most to least important, with retirement confidence in mind. I have found that this simple exercise of ranking the five variables is unique to each of us. With this ranking process, we can identify how to increase confidence at a personal level.
For a 60-year-old dentist, the confidence rankings might be: 1) retirement income, 2) investment risk, 3) investment return, 4) savings needed, and 5) retirement date. For dentists close to career end, I have found that retirement income is much more important than the retirement date, as long as the dentist is healthy.
Late-career dentists prefer to work longer to gain confidence for an adequate retirement income with lower investment risk. Typically, this is more important than the retirement date. Late in one’s career, confidence is increased with a high probability that retirement income can be achieved with low investment risk.
For a dentist in his or her 30s, the confidence rankings might be: 1) retirement date, 2) investment return, 3) savings needed, 4) retirement income, and 5) investment risk.
In our retirement preparedness survey in partnership with the Academy of General Dentistry, an interesting fact was learned: Younger dentists were determined to retire in their 50s. Meanwhile, older dentists were much more concerned about having adequate retirement income, and would work into their 70s — if need be — to have that confidence.
In this case, we might be instructed by the wisdom of our elders to construct a ranking of the five variables that is most aligned with reality and, ultimately, with retirement confidence. It is not necessary to work into your 70s to have confidence. What is necessary is to have a retirement plan.
A ranking that is aligned with the reality of the retirement problem might look like this: 1) retirement income, 2) savings needed, 3) investment risk, 4) investment return, and 5) retirement date.
As I think about the five retirement variables, retirement income has to be — in the end — the pivotal factor. The retirement date is a totally dependent factor that creates a mathematical sense of urgency to the problem. The other three variables — savings needed, investment return, and investment risk — are the three factors that greatly can increase or reduce the confidence for a successful retirement.
If I were to create something called the Retire with Confidence Process, it would have four steps. We have already conducted Step 1, which is to rank the five retirement variables.
Step 2 would be to calculate the first-pass assumptions for the five variables. Most dentists do not do this because advisors who help with this are either selling products or financial advisory services. Have your accountant solve the first-pass retirement need.
Use these initial assumptions: Retirement income = 70% of current income. Retirement date = you choose. Investment return = 7% with 3% inflation. Investment risk = use 5% withdrawal rate at retirement from retirement assets.
Have your accountant calculate the annual savings needed, taking into consideration the current amount you have already saved. The solution to this problem is the savings you need annually to achieve your retirement goal.
Step 3 is to assess confidence-building factors; i.e., could you implement a better deductible retirement program in your office, or could you increase savings by properly structuring debt, etc.?
Step 4 would be to develop a formal written confidence-building plan with detailed steps that outline strategies necessary to fully address each of the five variables.
With custom strategies to address the five retirement variables, you will greatly increase your confidence for a successful retirement.
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 [email protected].