Are the proceeds from your practice a significant portion of your retirement planning? If so, you need to carefully re-evaluate your retirement expectations!
An ADA survey suggests that only 4% of dentists have adequate savings to retire at the same standard of living as when they were working! Are you a part of that 4% or part of the 96% that will have to significantly adjust their lifestyle upon retirement?
As I teach transition seminars throughout the country and state the above-referenced facts, I see a look of anxiety, concern, and sometimes shock appear on the faces of the attendees when I suggest that they need to have in excess of $2,000,000 in their retirement plans to be reasonably sure of not running out of money. Most dentists, if they are funding retirement, are funding the minimum amount and if so doing, will never fund enough to meet their retirement needs. Brian Hufford of Hufford Financial Advisors suggests that you need 20times your present annual after tax income in your retirement plan to meet the 70% of your present spending or you may run out of money before you die. Not a pleasant thought!
What can you expect from your practice?The average practice sale price throughout the country is about 60% of gross collections. That means that if you have a practice that is grossing $800,000 you might expect to get $480,000 when you sell it. You most likely will have some costs associated with the sale, including commissions, legal and accounting fees, and, of course, taxes. The very best scenario would be that you would only pay capital gains taxes on the majority of the proceeds, which would reduce your take home to $408,000, and after expenses, you might see $350,000 that you could add to your retirement funds.
CHANCES ARE YOUR PRACTICE OVERHEAD WAS ~55% WHICH MEANS THAT YOU ARE GOING TO WALK AWAY WITH ABOUT 1 YEAR’S INCOME FROM THE SALE OF YOUR PRACTICE.
How can you prepare to retire comfortably? The first step is to really know where you are now. This includes:
- knowing the value of your practice now
- defining a realistic practice exit strategy
- knowing what your retirement needs will be
- having a retirement plan that will meet your retirement needs
- funding the maximum amount allowable in your retirement plan
There are ways to fund your retirement.One of your most valuable assets, your practice, is probably not working for you as an investment. Einstein said that the human mind cannot comprehend compounding. The reality is, large sums of money grow very fast if properly invested, and the proper retirement vehicle will grow tax free and almost double every 7 years at 10% return and 10% return is available in today’s market. If you have a few years before you retire, you can take advantage of the equity in your practice to fund your retirement and benefit by compounding.
The benefits.The total investment would nearly double over 7 years. If the maximum amount were placed in a defined benefit plan each year, not only would the proceeds grow tax free, your personal taxable income would be reduced by the amount placed in the plan, saving significant income taxes. The interest charged for borrowing the money would also be a tax deduction as a business expense.
The results.The results of leveraging the practice: gets your retirement funded, uses compounding to rapidly grow your retirement tax-free, and gets Uncle Sam to help pay the bill by reducing your income taxes significantly.
As practice brokers, the saddest thing we see is a dentist that has spent 30 years contributing to the community and then reaches retirement age without the wherewithal to retire with dignity and comfort. It’s always a pleasure to know that the sale of your practice is the icing on the cake.
To do.The following list will help you prepare for your successful retirement:
- Get your practice appraised. It is one of your most valuable assets.
- Have a Certified Financial Planner prepare a financial retirement plan for you.
- Identify your Financial Freedom Date—the date you will be financially able to retire.
- Fund your retirement to assure you achieve your Financial Freedom Date.
- If necessary, get the equity out of your practice to take advantage of the compounding growth of your retirement plan.
So, like Gene Autry, you’ll be able to ride off into the sunset of you life with the assurance that you will have the resources needed to enjoy your retirement.