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Start Saving for Retirement -- Now!
If, like most dentists, you have done a poor job of accumulating the necessary funds for retirement, you should not feel embarrassed, only concerned. You are just one of the majority, and the longer you have until retirement, the easier it is to make substantial contributions to your retirement savings.
Most 55-year-old dentists are quite far behind in funding for their retirement. With only 10 years remaining, some critical, life-changing financial decisions will have to be made.
Statistically, a very large number of these dentists will continue to ignore the “ticking clock” and will not do anything. Many will reach age 65 to discover that their practice is not worth what it was 10 years earlier, and many will have to continue to practice because they will not be in a financial position to retire comfortably.
A much smaller group of these 55-year-olds will really knuckle down and start pouring as much funding as they possibly can into a pension plan. If they remain healthy and their practice income does not drop off over the next 10 years, many will reach age 65 with adequate retirement dollars. Unfortunately, it will be necessary for most of these dentists to sacrifice many personal financial needs and goals in order to fully satisfy their retirement needs. In addition, maximizing pension contributions for the doctor also means maximizing contributions for the employees. Not that the employees don’t deserve it, but it will represent another significant cash flow drain on the doctor.
And finally, a very small percentage of these 55-year-olds will make the most of their options. This group will not only adequately fund for their retirement, but will do it without suffering any reduced personal income and without sacrificing any personal needs and goals. And it is to those who wish to be included in this lucky group that we devote the remainder of this article.
Dr. Lucky is one of these 55-year-old dentists in our final group. Dr. Lucky sells his practice now for $500,000, and receives not only favorable tax treatment, but also a contractually guaranteed 10 percent interest rate. The structure allows Dr. Lucky to continue to work full-time for as long as he chooses and be compensated 40 percent of his personal collected production. In addition, he will be able to pick and choose the procedures he wants to do and the patients he wants to continue to treat.
But there’s more to Dr. Lucky’s story -- at least 75 percent of the practice sales proceeds are taxed at very favorable capital gains rates instead of top bracket ordinary income tax rates. This represents a potential annual tax savings. This creates an enormous financial advantage.
If Dr. Lucky uses his “tax-favored” practice sale proceeds to support his family’s annual living needs, he can then use his provider compensation to maximize his annual contributions into a pension plan. In fact, he may be able to utilize a defined benefit plan to shelter virtually all of his commission income, thus having very little income that is taxed at ordinary income tax rates. Another major advantage is that he will have no employees to make pension contributions for other than himself.
What does all this mean? Freedom and dignity! Dr. Lucky will easily fund a handsome retirement nest-egg by age 65 (or probably even sooner); he will pay far less in income taxes each year; he will enjoy substantially more after-tax income, unless he decides to off-set the higher income with less clinical time; he can enjoy more frequent and longer vacations; his family will be fully protected in the event of disability or death; he will not have any more practice overhead; and he will not have any more practice administrative responsibilities.
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