How many dollars can a dentist expect to have accumulated in order to retire comfortably?

Recently, we learned that senior American Airline pilots who retired at age 60 had retirement accounts of approximately $1 million and annual salaries of about $130,000. Given the investment in time, education and physical plant-plus the daily stress that a dentist assumes-is it not fair to aspire to at least as much as a pilot?

What are the three major assets a dentist will have at retirement?

• A savings (investment) plan
• A practice
• Domicile(s)

Since a retired dentist still needs housing, we will not consider the value of the domicile(s) in determining the assets that are available for investment.

To achieve a retirement goal of $1 million, a dentist will need to invest $20,000 per year (after taxes) for 25 years and need to earn 5 percent a year (after taxes). This translate to a before tax net income of about $30,000 per year for 25 years.

If a dentist wants to earn $130,000 per year before taxes - in order to maintain a lifestyle comparable to a pilot - a dentist needs to add another $30,000 to his/her earnings to fund a retirement program. Now he/she needs to net (before taxes) $160,000 per year.

If we can assume a 35% net profit, this translates to a needed gross of $450,000 per year over 25 years. (This does not factor in any inflation!)

These kinds of earnings do not permit an extravagant lifestyle! Let's look.

Thirty six thousand dollars a year doesn't leave a lot of room for country club living, private school, long vacations, daughter's wedding, or college tuition-and you haven't even bought your food!

So where will this $450,000 a year gross come from?

We'll work 48 weeks a year, 32 hours a week, or about 1,500 hours a year and we'll factor some lost hours due to cancellations/failures.

This means that a dentist's average production must be $300 per hour. If, in any hour, a dentist earns less, he/she must make it up in another hour.

Every fee must be calculated with this minim hourly gross in mind. In fact, it is this author's opinion that this is the only way to calculate your minimum office fee for each procedure. You must calculate the time you need for each procedure (performed excellently and without haste), and place a minimal dollar value on that procedure.

Herein lies the critical fault of PPOs and capitation plans. They reduce fees without regard to how it will affect your life, your children, your success or failure as a parent and a provider. Your fee reduction doesn't go to the patient. Rather, it is taken away from you and your children, depriving them of fair remuneration needed to ensure your future and your children's future.

This simple calculation allows you to evaluate the bankrupt concept of PPOs. Just look at their 3-surface amalgam allowance. Can you really afford to render a service at a fee level that will never allow you to be financially secure.

So, we began with the end. One million dollars. No factoring in inflation. No excessive lifestyle. We saw what has to be done to get their- dollar-wise and practice-wise. This creates the savings/investment portion of your assets when you retire.

What about he value of your practice as another asset?

If we look at statistics available from the IRS, a good practice, grossing $450,000 will sell for $270,000 - $320,000.

The dollar you obtain from your practice sale can accomplish one of two things:

• Allow the $1 million in savings/investment to grow via the magic compound interest for another five years, or
• Bring the nest-egg of $1 million if you had lean years because of school expenses, illness, parent needs, college tuition, weddings, etc., preventing appropriate funding.

At retirement, you no longer have a need for savings, mortgage, insurance, college, etc. Thus, our "living" expenses are less. If we can live on the proceeds of the sale for five years-and if we had $1 million in retirement-in five years at 6% after tax, that $1 million becomes $1.33 million. You can invest that at 6% tax-free, live on the $80,000 tax-free income, and give or will your children or grandchildren a head start on life.

Doesn't this sound fair and equitable? It this too much for the best and brightest to expect as a reward for serving society over a lifetime?

Let's assume you've had serious financial setbacks and have been unable to fully fund the $1 million. Let's assume you only managed to accumulate $750,000. Well, the proceeds from the practice can sustain you for a five year period while the $750,000 grow to $1 million through the magic of compounded interest, approximating your original goal.

The value of your practice is an enormously valuable asset, provided you planned properly for the end-at the beginning!

Now you know why we say retirement planning begins with the end!

Published in Profitable Dentist, 1998.
Robert J. Mallin, DDS, CFP.