Dentist Newsletter

Volume 1

As we all know, Dentistry is a noble profession. We dentists have always enjoyed a position in the upper echelon of professions with regard to honesty and integrity. Dentists earn a fine living and believe me we work very hard for it. If money becomes the driving force, however, we fall short of our purpose. It's the services to others that counts. It is the giving back. This is my humble attempt to give back to a profession that I love.

I started the Mentoring Dentist to help Dentists in all areas of their life. There are many Dentist Newsletters and companies that stress profitability, some that focus on practice management, those that share clinical pearls and still others that dole out financial advice and content. My desire is to help mentor you in all areas of your life. I will share with you articles in all these areas and more. I hope to have many of you write in and share your tips and words of wisdom as well. This is a huge undertaking, but I am confident I can make a difference.

Serving as a mentor in the lives of other dental professionals is my mission. Through the Mentoring Dentist educational programs, web site, online newsletter, and seminars, I hope to make a positive impact on the lives of those in the great profession of Dentistry. I ask for your help and support. I look forward to hearing from you. My email address is mentoringdentist@qwest.net.

IF YOU WOULD LIKE TO SUBSCRIBE TO THE MCGILL ADVISORY NEWSLETTER, CALL THE MENTORING DENTIST AT 319-465-7000.

Achieving a financially secure retirement remains the primary goal for most doctors. Yet, few doctors realize how lower investment returns dramatically increase the assets required to maintain their standard of living in retirement, and substantially increse the annual savings required to get there. Here's what you need to know to make usre that you don't get caught short.

Most doctors with whom we meet for tax and financial planning purposes want to determine when they will achieve financial independence and be able to retire. We advise doctors that the amount of assets required to retire will depend on several factors unique to their situation. These include the doctor's retirement age, assumed investment return, projected life expectancy, and effective tax rate.

In our September 2001 issue, we advised doctors that the most critical variable in the process was the doctor's current spending level. While some doctors live comfortably on as little as $5,000 a month after taxes, others with a "black belt" in spending need three times ($15,000 a month) as much. Obviously, the assets required to fund a successful retirement will vary dramatically for doctors at these two extremes, regardless of the other variables involved.

Many doctors have been able to accurately determine their current spending levels and calculate the amount of assets required at retirement in order to maintain their standard of living (with inflationary increases), based upon historical investment returns. For this purpose, many doctors have assumed an 8.0% investment return on their accumulated assets, in order to generate the income that they need to maintain their standard of living in retirement.

Unfortunately, an 8.0% return has been difficult to achieve over the past five years. From 2000-2004, the S&P 500 Stock Index achieved a total return of -11.0%. Meanwhile, more conservative bond investments delivered a 45.0% total return over the same period, as measured by the Lehman Brothers Aggregate Bond Index.

Thus, doctors with all of their investment assets in sotcks saw their retirement nest egg dwindle significantly, causing many to postpone their plans for retirement, while others were forced to "unretire". Moreover, even diversified doctors, who had 60% of their assets in stocks and 40.0% in bonds, achieved a meager return of 11.0% over this 5-year period, or just over 2.0% per year.

Many doctors and their advisors may well argue that investment returns over the last five years represented an abnormal time for the market and these meager investment returns will not likely reoccur. Yet, some of the brightest minds in the investment business (Warren Buffet, Peter Lynch, etc.) are predicting stock market returns in the single digits over the next decade. Moreover, forecasts for bond returns are also in the 5-7% range, since rising interest rates will preclude any increase in bond prices.

Accordingly, doctors should consider using more conservative investment returns (6.0%) to determine their savings requirements to achieve financial independence. This will create a margin of safety. Even if these assumptions turn out to be too conservative, the excess assets will make doctors' retirement years that much more enjoyable.

The chart below shows the assets required at retirement to maintain the doctor's standard of living in retirement (adjusted for inflation at 3.0% annually), based upon achieving a 6.0% return versus an 8.0% return. These calculations assume that the doctor retures at age 65 and enjoys a 35-year retirement, and lives until age 100.

Furthermore, it assumes that the doctor will pay an average of 30.0% of the income generated in retirement for federal and state income taxes. While the edoctor's marginal tax rate (the percentage paid on the last dollar of income earned) may be higher, a retired doctor's average tax rate rarely exceeds 30.0%. Some income is generally nontaxable (e.g., return of capital from the sale of personal assets), while other amounts of income are offset by itemized deductions and persional exemptions, and a portion of the income is taxed at the lower 10.0%, 15.0%, and 25.0% brackets.

For example, a doctor with current personal living expenses of $7,500 a month after taxes would need to accumulate $2,050,650 to fund a financially secure retirement, based uon an 8.0% post-retirement investment return. However, should the investment return slip to only 6.0%, the doctor would need to accumulate $2,557,500. This represents an increase of $506,850, or approximately 25.0% more, due to the lower investment return.

However, lower investment returns not only affect the lump sum required at retirement to maintain the doctor's income streatm, but also the annual savings required in order to accumulate that nest egg.

The chart below shows the difference in annual savings required to meet the doctor's retirement goals at a 6.0% versus 8.0% investment return, for doctors with a 10, 20 or 30 year time horizon.

For example, a 35 year old doctor who wishes to maintain his $7,500 a month personal living expense needs in retirement, would need to save $16,404 annually for 30 years, based upon an 8.0% investment return. However, if the doctor's investment return drops to only 6.0%, the amount of annual savings required increases to $30,396. This represents an annual increase in savings required of $13,992, or 85.30%.

Accordingly, doctors should review the charts above to determine the level of assets required at age 65 to assure a financially secure retirement in this era of lower investment returns. Furthermore, they should also increase retirement plan and personal savings on a monthly basis to assure that the assets required are available for them in retirement.

IF YOU WOULD LIKE TO SUBSCRIBE TO THE MCGILL ADVISORY NEWSLETTER, CALL THE MENTORING DENTIST AT 319-465-7000.

Achieving a financially secure retirement is the primary goal for most doctors. Declining practice values and poor investment returns over the past two years have caused many doctors to reconsider their plans for retirement and assumptions regarding how much they will need. Below, we analyze the amount of assets required for doctors to achieve a financially secure retirement in this rapidly changing environment.

Most doctors with whom we meet for tax and financial planning purposes want to determine when, and if, they will be financially able to retire. Most are confused by the ever-changing “rules of thumb” bandied about by different financial advisors. Some advise doctors that $1,000,000 in liquid assets is sufficient to allow them to comfortably retire, while others set the mark at $1,500,000, and others at $2,000,000 or more.

The reality is that the amount of assets required for a doctor to comfortably retire will depend on several variables unique to his situation, including his retirement age, assumed investment return, projected life expectancy, and effective tax rate. However, by far and away the most critical variable in the process is the doctor’s current spending level.

Our experience has shown that some doctors live comfortably on as little as $2,500 a month after taxes. Others have achieved a “black belt” in spending and need $20,000 or more a month after taxes simply to maintain their current lifestyle. Obviously, the assets required in order to fund a successful retirement will vary dramatically for doctors at these two extreme spending levels, regardless of the other variables described above.

That’s why the first step in the process is for the doctor to accurately determine his current spending level. Doctors who have computerized their personal finances can easily determine this amount simply by running a summary of their personal living expenses for the past twelve months, deleting any major non-recurring items, and simply dividing by 12 to arrive at a monthly figure. Non-computerized doctors can achieve the same result by reconstructing their personal spending over the last twelve months through manually recording expenses from their cancelled checks, bank statements, and credit card statements.

While the government reports that doctors age 65 or older spend less on food, clothing, housing, transportation, and entertainment than in their pre-retirement years, our experience is that increased travel, medical, and other costs usually eat up the difference. As a result, most doctors experience little change in their annual cost of living after retirement.

Once the doctor determines his current monthly after tax personal living expenses, the chart below can help him determine the amount of assets required at retirement (age 65) in order to assure a comfortably secure retirement, based on several assumptions. First, it assumes that the doctor will pay an average of 30% of the income generated in retirement for federal and state taxes. While the doctor’s marginal tax rate (the percentage paid on the last dollar of income earned) may be higher, a retired doctor’s average tax rate rarely exceeds 30%. Some income is non-taxable (e.g. return of capital from sale of personal assets), while other amounts of income are offset by itemized deductions and personal exemptions, and a portion of the income received is taxed at the lower 10%, 15% and 28% brackets.

These calculations also assume that the doctor retires at age 65, and enjoys a 35-year retirement (until age 100). Furthermore, it is assumed that the doctor achieves an 8% pre-tax rate of return on the amounts invested for retirement.

The amounts shown below represent the income producing assets required at retirement to meet the doctor’s personal living expense needs. Accordingly, the value of the doctor’s personal residence, vacation home, practice assets, personal property, and life insurance are ignored.

In the fourth column, the amounts shown do not take into account any inflationary increases in the amount of income required to meet the doctor’s retirement needs each year, since it is assumed that inflationary increases would be fully offset through the receipt of Social Security benefits. The final column in the table provides an even more conservative approach and reflects the amount required to maintain the doctor’s personal living expense needs, including a 3% annual increase for inflation.

For example, a doctor who currently spends $10,000 a month, or $120,000 annually (after taxes) to meet his personal living expenses would need $171,429 in pre-tax dollars, based upon a 30% average federal and state income tax rate. This doctor would need to accumulate $2,011,338 in liquid assets at age 65, in order to maintain that income level over his assumed 35 years of retirement, without adjusting for inflation. Assuming that his personal living expense needs would increase by 3% annually for inflation, the doctor would require $2,830,612 in assets at age 65 in order to assure a financially secure retirement.

Doctors should review the chart below to determine the level of assets required at age 65 to assure a financially secure retirement for them. Moreover, they should take advantage of the new tax laws and fund their retirement plans in the priority discussed earlier in this issue, to assure that these assets are available for them at retirement age.

You've heard the expression you only get one chance to make a first impression. It should be a given that you have a highly trained personable receptionist fielding calls with multiple lines coming in. What happens when a patient or prospective patient is placed on hold? This is your chance for your telephone to seal the deal.

If you are a practicing dentist, it is a must that you have a message on hold system. You would think that this is a no brainer, but you'd be surprised at how many offices don't have them. I'm not talking about piped in music from the local oldies radio station. I'm referring to a series of short scripts that educate existing and potential patients about your services and what you have to offer them.

Here are some interesting statistics. 50% of all calls are placed on hold. 10% of all first time callers placed on hold will hang up and 50% of those callers will immediately call another office. The majority of your patients can only describe one service you provide.

Stop losing patients to an inefficient calling experience. Use the on hold experience to market your practice and educate your patients and prospects on why you should be their dentist. I have been using a message on hold system for years. I am currently running ten messages and use the company Tel-A-Patient. Call us if you would like more information on Tel-A-Patient. They are very professional and worth the investment.

Monthly After-TaxPersonal Living Expenses	Annual After-TaxPersonal Living Expenses	Annual Pre-Tax Personal Living Expenses	Amount Required at Age 65 (No Inflation)	Amount Required atAge 65 (3% Inflation)
$2,500	$30,000	$42,857	$502,832	$707,649
$5,000	$60,000	$85,714	$1,005,663	$1,415,298
$7,500	$90,000	$128,571	$1,508,495	$2,122,947
$10,000	$120,000	$171,429	$2,011,338	$2,830,612
$12,500	$150,000	$214,286	$2,514,070	$3,538,261
$15,000	$180,000	$257,143	$3,017,002	$4,245,910
$17,500	$210,000	$300,000	$3,519,833	$4,953,559
$20,000	$240,000	$342,857	$4,022,665	$5,661,208