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Five Secrets to Building Wealth in Dentistry
As a practicing Dentist, your career will last around 30-35 years on average. During this time an average Dental Practice will have about $30,000,000 pass through collections. One would think that this would be enough for all Dentists to retire Financially Independent and debt free. However, ADA statistics tell us that less than 10% of Dentists can afford to retire at age 60 and stay at the same standard of living. Why does this happen? Certainly, most practices produced and collected enough money. The problem lies in a lack of systems and strategies to capture the revenue when it’s made. In this article we will look at 5 secrets that a Dentist can use to help build wealth and retire Financially Secure.
Secret #1 – Pay yourself first. I could write a whole book on the importance of this strategy. Most Dentists pay themselves a small salary to keep payroll taxes low and take corporate distributions from the profit of the practice. The trouble is there is not much left over after all bills are paid. If, however, you pay yourself enough in salary to not only take care of your present personal expenses, but also save enough for your future needs, you ensure all your retirement accounts are fully funded. By paying yourself first, you make sure you save the correct amount for Financial Independence. Every other bill gets paid afterwards. It’s amazing how this works.
Secret #2 – Save both pre-tax and after-tax money for your future needs. Most Dentists save pre-tax through their office retirement accounts. However, they don’t generally save enough after-tax money. This is because they don’t understand the importance. Saving pre-tax money gives you a tax break now. This is helpful while you are in the high earning years. The money grows tax deferred for years. However, when you pull the money out in retirement, it is 100% taxable. With the money you save after-tax, you only pay tax on the interest, dividends, or capital gains on sale. Typically, every year you pay a little tax depending on the performance of your investments. By doing so you have a very tax efficient account to draw from early on your retirement.
Secret #3 – Put all your saving and investing on automatic. Create an Automatic Investment Plan to monthly fund your accounts. By doing so you are dollar cost averaging into the market. In the months when the market is down, you buy more shares of your chosen investments. When the market is up, you are buying less. This is being smart as an investor without even trying. You can never time the market. This is an impossible task. The important strategy is time in the market.
Secret #4 – Work with a team of Professionals to help you reach your goals. Most Dentists are very good at Clinical Dentistry. They go to 8 years of college. Most take a lot of clinical continuing education to be the best they can. None of us are great at everything. Find a great team of Professionals to help you achieve your financial and business objectives. Who should be on your team? 1) A great Financial Advisor who knows and understands Dentistry. He can help you plan, save and invest for success. The best Financial Advisors will help to increase your performance and guide your decisions at the proper times. 2) A Dental CPA. This person will help reduce the drag of taxes and help to keep you legal and complainant. 3) A Practice Management Consultant. When you grow the top line revenue of a practice, it makes it easier to save for the future. Work with a firm that knows Dentistry. 4) An attorney to help with contracts, legal questions and estate planning needs.
The very best team has all these professionals talking to each other and all working for your benefit as a practicing Dentist.
Secure #5 – Don’t worry about the wrong things. Most Dentists will spend a lot of time and energy worrying about things that they either can’t control or don’t matter at all. Here are some (not all) of the things that we worry about that we shouldn’t.
1) The economy and the market. We have no control of our country’s economy or the direction of the market. Concentrate on your own economy, your Dental Practice. Implement the strategies that will improve your practice and make it more profitable. Work with your Advisor and save and invest regularly. Over time, your results will be much better.
2) The price of Dental supplies, labor costs and investment costs. You can’t control the prices of goods. Work with a good supply rep who can help you daily and in a pinch. There will come a time when your compressor or vacuum goes out. You need someone you can call and have them there that day. Your Financial Advisor should save you a tremendous amount of money by keeping you from making emotional decisions about your investments. He should help you make a Financial Plan which you stick with. This keeps you focused on your long-term goals and not any short-term noise. Statistics show Dentists that work with a Financial Advisor do 3-4% better in performance on average. Stop listening to the news, it’s usually negative and has no real value.
3) Keeping too much in cash in savings. While it’s prudent to keep some cash in reserve for unseen circumstances, most Dentists hoard way too much in cash. It sits in a business savings account earning next to nothing. Some of this cash could be better invested. Even a money market type of account earns more than a savings account. Large businesses manage their cash this way. They always have their money working hard for them.
4) Worrying about when to buy an investment or which one is the next tech magnet. Successful long-term investing is not about timing the market or picking the next big stock. Investing with a carefully thought-out plan based on the Dentist’s goals, objectives and timeline is always best. Set the plan on automatic and adjust periodically.
These are only 5 of many secrets to building wealth for Dentists, but they will help you to get started on your financial journey.
Dr. James Pitts is a licensed Financial Advisor and Registered Investment Advisor Representative with Professional Financial Strategies. He previously practiced Dentistry for 26 years in Florida. Dr. Pitts sold his Dental practice and retired Financially Independent. His passion for the last 14 years has been to help Dentists achieve their Financial and Business goals. For more information, contact Dr. James Pitts of Professional Financial Strategies at (727) 686-4068 or james.pitts@jwcemail.com.
Securities offered through J.W. Cole Financial, Inc. (JWC) member FINRA/SIPC. Advisory Services offered through J.W. Cole Advisors, Inc. (JWCA), Professional Financial Strategies and JWC/JWCA are unaffiliated entities.
Planning For Transition
The average career of a Dentist spans over 30 years. A lifetime of issues can occur during this time. Two of the most critical times in a career are when a Dentist starts or buys their practice and when they transition to retirement.
The importance of preplanning before the sale or transition can’t be overstated. No area is more impactful than Financial Planning.
There are so many important systems and strategies to have in place before you consider a transition. In this article, we will look at 3 different scenarios that will show the importance of solid Financial Planning in advance of a transition.
In each instance, we will assume the Dentists sell their practice for $1,000,000.
For the first case, Doctor A did no real preplanning. He was burned out after a long career and was ready to sell immediately. He had the same retirement plan that he had started practicing with 30 years ago, a SIMPLE Plan. He was counting on the sale of his practice to get him through retirement. He leased his office space and had purchased new dental equipment recently.
Doctor B knew the day was coming a few years ago. He had changed his office retirement plan years ago to a 401k. He was ready to sell, however he wanted to continue to work for a couple of years for the acquiring Dentist. Doctor B had previously purchased his office building and still owed a significant amount on the real estate loan.
In our final scenario we meet Doctor C. About 5 years ago, he started planning for the transition of his practice. At that time Doctor C met with his Financial Advisor and discussed his plans. As he had a very profitable practice and taxes were always an issue, he decided to incorporate a Defined Benefit Plan. This Defined Benefit Plan operated for 5 years alongside his 401k Plan. In addition, Doctor C had previously paid off his debt that he had on the dental office real estate. His dental equipment was old but still was very functional at the time of the sale. One area Doctor C’s Financial Advisor had focused on was to build up his non-qualified investment portfolio. Also, Doctor C’s Financial Advisor worked with his transition specialist to time the sale of the practice to minimize taxes.
These illustrations are purely for information purposes and are not meant as tax advice.
Please contact your CPA for specific tax advice with any planned transition. The scenarios assume all Doctors are Married filing jointly and don’t include any deductions for itemization or the Standard deduction.
Doctor A Sold the practice near year end in December of year 1
Revenue
Income from practice $ 400,000
Sale of practice $ 1,000,000 80% Goodwill/20% Equipment
Total Yearly Income $ 1,400,000
Less Cost of Sale 10% - $ 100,000
$ 1,300,000
Deductions
Contributions to SIMPLE Plan $ 16,500 + $ 3,500 catch up + match $6,000 = $26,000
Total Taxable Ordinary Income $400,000 - $ 26,000 = $ 374,000
$ 900,000 x 20% = $ 180,000
$ 554,000
Total Capital Gains $ 900,000 x .8 = $ 720,000
Taxes – Married Filing Jointly
Ordinary Income $ 132,994.50
Capital Gains $ 720,000 x .2 = $ 144,000.00
Total Tax $ 276,994.50
Net from sale $ 1,300,000 - $276,994.50 = $1,023,005.50
No further income from Dentistry or Real Estate
Doctor B Sold the practice near year end in December year 1
Revenue
Income from practice $ 400,000
Sale of practice $ 1,000,000 90% Goodwill/10% Equipment
Total Yearly Income $ 1,400,000
Less Cost of Sale 10% - $ 100,000
$ 1,300,000
Deductions
Contributions to 401k $ 70,000 + $7,500 catch up = $77,500
Spouses Contribution to 401k $ 35,000 + $7,500 catch up = $42,500
Total Taxable Ordinary Income $400,000 - $ 120,000 = $ 280,000
$ 900,000 x 10% = $ 90,000
$ 370,000
Total Capital Gain $ 900,000 x .9 = $ 810,000
Taxes – Married Filing Jointly
Ordinary Income $ 35,302 + $ 39,192 = $ 74,494
Capital Gains $ 810,000 x .2 = $ 162,000.00
Total Tax $ 236,494
Net from sale $ 1,300,000 - $ 236,494 = $1,063,506
Doctor B continued to work 2 days a week for the new owner and made about $ 96,000 in income. He also leased the building to the new owner over the next 5 years and paid off the Real Estate loan. After 5 years, Doctor B continued to receive income from the rental of the Dental Office Real Estate.
Doctor C Sold the practice just after year end on January 1st of year 2
Income from practice $ 400,000 in year 1
Sale of practice $ 1,000,000 in year 2 95% Goodwill/5% Equipment
Less Cost of Sale 10% - $ 100,000
Gross Proceeds $ 1,300,000
Deductions
Contributions to 401k in year 1 $ 70,000 + $7,500 catch up = $77,500
Spouses Contribution to 401k in year 1 $ 35,000 + $7,500 catch up = $42,500
In year 1 Contribution to Defined Benefit Plan $ 270,000
In year 2 Contribution to Defined Benefit Plan $ 280,000
Total Taxable Ordinary Income $400,000 - $390,000 = $10,000 year 1
$900,000 x .05 = $45,000 year 2 $55,000
Total Taxable Capital Gains $900,000 x .95 = $855,000
$855,000 - $280,000 = $575,000
Taxes-Married Filing Jointly
Ordinary Income $1,000 + $4,923 = $5,923 for years 1 & 2
Capital Gains $575,000 x .2 + $115,000 year 2
Total Tax $ 5,923 + $115,000 = $120,923 years 1 & 2
Net from sale $ 1,300,000 - $ 120,923 = $1,179,077
Doctor C continued to work for the new owner 2 days a week and made an additional $96,000 in year 2. He also leased the building to the new owner for 10 years and all the lease proceeds were profit to him. In addition, Doctor C had worked with his Financial Advisor and built a solid portfolio of after-tax assets which he could access.
These calculations don’t factor in the additional income that Doctors B & C received working for the acquiring Dentist in year 2. The calculations also don’t factor in the lease payments received as income by Doctors B & C.
This simplified scenario shows how with good financial planning and effective financial strategies you can maximize your profit from the sale of a Dental practice. The article also points out several methods to help mitigate taxes with the transition. For further information, please contact James Pitts at (727) 686-4068 or james.pitts@jwcemail.com
Dr. James Pitts is a licensed Financial Advisor and Registered Investment Advisor Representative with Professional Financial Strategies. He previously practiced Dentistry for 26 years in Florida. Dr. Pitts sold his Dental practice and retired Financially Independent. His passion for the last 14 years has been to help Dentists achieve their financial and business goals.
Securities offered through J.W. Cole Financial, Inc. (JWC) Member FINRA/SIPC
Advisory services offered through J.W. Cole Advisors, Inc. (JWCA).
Professional Financial Strategies and JWC/JWCA are unaffiliated entities.