DMD Staff

Many of the financial planning articles on 

 talk about planning for retirement in the abstract. There is a good reason for this: few dentists know exactly when they will retire. This is true for many people in many professions, of course, but it can be especially true for dentists, who often will rely on the sale of a practice as a major portion of their retirement income. 

But if you’re within five to 10 years of retirement, it may be worth it for you to consider setting an actual date by which you plan to retire. Even if you don’t actually retire on that date, setting a specific day in a specific month in a specific year can help you make the final push you’ll need to save and invest for your future. 

As with all future planning, having a vague idea of what you’re trying to accomplish may lead to a very fluid saving and investing strategy. For example, many people think, “When I get closer to retirement, I’ll really crank up my investments.” But keeping the retirement date vague means keeping the goal of ramping up your investments vague. Consider also that for many dentists, the ages between 50 and 60 bring some larger than normal expenses, such as paying for a child’s college education or helping a dependent on a first-time mortgage. 

Now let’s go back a few years earlier, and say that you’re in your early 40s. That retirement date seems even farther off, and therefore less of an immediate savings concern. You may catch yourself thinking: “My retirement is two decades from now. I’ll have plenty of time later.”

In your 30s, you may still be paying off dental school debt, establishing your own practice purchase plans, and looking into buying a house. Surely, now, with your income not yet at its peak and your expenses very high, isn’t the right time to save for an indeterminate period that’s more than three decades away.

Setting a retirement date is easy, because it won’t be set in stone. I’m not sure a single person in the history of the world has chosen a specific retirement date in their 30s and then 

 on that date. The idea is simply to have a specific goal in mind, because doing so will make it much easier to establish workable savings goals and stick to them. 

Math is, by its nature, objective. Knowing your retirement date, and then knowing your savings goal, allows you to determine exactly what you’ll need to set aside each month in order to be able to retire comfortably. Setting your date allows you to picture very specifically what retiring then should mean for your investing goals now. 

Articles

Setting a date for your retirement -- even if it's far off -- can help you realistically plan for your future.

Should You Set a Retirement Date?

In the first two parts of this series, we looked at reverse mortgages and their benefits and drawbacks. But there’s another strategy you can use to accumulate retirement income from your home: downsizing to a smaller or less expensive residence.

While spending less on a mortgage or on property taxes can be undeniable boost to income, the decision can be a difficult one. The mere idea of downsizing can be very difficult for many people, because of the emotional investment many have in their home, and also because it means not leaving the family home as an inheritance. But there are some financial reasons for not downsizing as well. Let’s take a look. 

A common view of retirement income is to treat a home not as an investment, but as a living expense. But this view can be complicated. If your home has increased significantly in value, or if property taxes have made living in your area a very expensive proposition, it may be worth looking into the pros and cons of a move to a different or smaller property.

First, smaller doesn’t always mean less expensive. Moving closer to an urban area with easily accessible public transportation may mean less house at a similar cost, or higher taxes. Don’t consider size alone the determining factor in how much the new housing situation will cost. When looking at current property values and property tax obligations, consider future growth or other economic factors that may lead to a spike in your costs. For example, a large urban development project on the horizon may mean that property taxes will soon be headed in the wrong direction for someone looking to save money.

Also consider whether downsizing will free up as much money as you think. In areas that are already low-cost, choosing a smaller property may not mean all that much difference to the bottom line. 

Selling your home and purchasing a cheaper one leads to a capital gain, and capital gains are “taxable events.” That means that Uncle Sam will be coming for a piece of that income, but only if it’s an especially large gain. Moving, of course, also comes with realtor fees and closing costs.

Perhaps most important of all, downsizing comes with the emotional toll of leaving a place you may have called home for a very long time. Factor into your decision whether the “extra” spending money you’ll have will be enough to assuage missing the place that you’ve called home for a long time. 

One way to boost your nest egg in retirement is to move to a smaller home. However, downsizing alone isn't always a financial boon.

Using Your Home for Income, Part 3: Downsizing

In Part 1 of this series, we covered the basics of a reverse mortgage, a retirement income strategy that is growing in popularity among older homeowners. One of the reasons for this growing usage of reverse mortgages is that many retirees or near-retirees discover that they simply don’t have enough income to comfortably retire.

Extra income is one of the key strengths of reverse mortgages. But there are some cons as well. Let’s take a look.

The primary benefits of reverse mortgages are that they do not require monthly payments from the borrower; the proceeds from the loan can be used without restriction; the money can be used to pay off the existing mortgage, and that the funds can improve your monthly cash flow. 

The drawbacks, however, bear some consideration. First and foremost, the whole thing can be a bit confusing. Who is getting paid when, and when does it need to be paid back? Who is paying it back? (More on this in a moment.) 

Fees and other costs associated with securing the loan can be high; closing costs are higher for a reverse mortgage than they are for a typical mortgage—as is the interest rate. And the homeowner must maintain the home and continue to pay property taxes and homeowner’s insurance. Failure to do so can lead to significant consequences, such as having to pay the loan back early. If you have plans to will the home to a family member, a reverse mortgage can complicate those plans.

Because of these questions and complications, homeowners interested in pursuing a reverse mortgage are required to receive mandatory (free) counseling by an independent third party from an organization such as the American Association of Retired Persons. This review session can help you determine whether the benefits outweigh the drawbacks for you, and it’s one of the reasons reverse mortgages no longer have a very negative stigma associated with them. 

Perhaps the most significant drawback of a reverse mortgage is that using the equity in your home for living expenses today means a smaller estate for you to pass along as an inheritance. Those sticky questions above about who pays for the loan and when? The answers can be a little complicated, but it usually amounts to: the borrower’s heirs, and very soon. Yes, the heirs will use the actual sale of the home to pay back the loan, but that will obviously mean a significantly lower inheritance.

In Part 3, we’ll look at downsizing the home as a source of income.

There's a reason homeowners are required to undergo financial counseling prior to taking out a reverse mortgage -- they're confusing. This primer will help you get a handle on the scenario.

Using Your Home for Income, Part 2: Pros and Cons of Reverse Mortgages

If you’re a dentist at or near retirement, chances are that home ownership has been part of your personal and financial picture for some time. This may mean an emotional attachment to your home, or a feeling that the home is too essential a part of your life to be considered an investment. 

But the simple truth is that if you own a home, it can be considered as part of your retirement assets, and it may even become an essential source of income for you. Over three parts, we’ll look at two strategies that allow you to use equity in your home as retirement income. First, we’ll examine the potentially confusing topic of reverse mortgages in parts 1 and 2. In part 3, we’ll look at downsizing your mortgage.

A reverse mortgage—also sometimes called a home equity conversion mortgage&mdash;is a type of home equity loan generally only appropriate for older homeowners. It does not require monthly mortgage payments. The loan is repaid after the borrower moves out or dies. It is also known as a home equity conversion mortgage, or HECM.

The strategy has only been around since the late 1980s, and at first it was considered only an option of last resort for the truly cash-strapped. But recent years have seen some financial experts changing their tune about the appropriateness of reverse mortgages. 

Generally speaking, it is for people who 

Can afford the cost of maintaining their home.

Need or want extra income to pay for daily living expenses or for a rainy-day fund.

The bank makes payments to the borrower throughout his or her lifetime based on a percentage of the home equity the homeowner has accumulated. The loan balance does not have to be repaid until the borrower dies, sells the home, or permanently moves out. There are no limits on how the money can be used, and any homeowner over the age of 62 who either owns the home outright or has only a small remaining mortgage can be eligible for one. 

The amount of a loan you can get depends on your age, the appraised value of the home, any remaining mortgage amount, and current interest rates. Only homes used as primary residences can be used. 

One of the most attractive aspects of a reverse mortgage is that the homeowner can never owe more than the value of their home in a reverse mortgage loan, no matter how much is borrowed. But there are some pitfalls to be aware of as well. In Part 2, we’ll look at pros and cons of reverse mortgages. 

Reverse mortgages aren't right for everyone, but they're a concept some soon-to-be retirees might want to consider.

Retirement Strategies: Using Your Home for Income, Part I

Earlier this week, the financial industry was shaken by the news that banking giant Wells Fargo was hit with $185 million in penalties for illegal sales practices. That news was surprising in and of itself; Wells Fargo had a pretty good reputation in financial circles. But much more shocking than the amount of the fine—a pittance in relation to the bank’s revenue&mdash;was the reason for the fine: the company was accused of illegally “opening unauthorized deposit and credit card accounts” on behalf of its unsuspecting customers, as reported by 

To pad its performance numbers, regulators allege, the company also issued debit cards with fake personal identification numbers and used fake email addresses to secretly sign up customers for online banking. They even transferred customers’ money to the bogus bank accounts, at times leaving a low balance and triggering overdraft or other charges

Investigations into the company’s banking practices are ongoing, and irate customers are sure to seek remuneration from the company. But even if you don’t bank with Wells Fargo, it’s a good reminder that even big institutions with a lot to lose reputation-wise can stray from the straight and narrow. Let’s take a look at ways to protect yourself.

The first and most obvious step is to do a thorough check of any institution that may handle any aspect of your finances. This includes banks, retirement providers, health and life insurance providers, advisors or brokers, and even attorneys and estate planners. The Financial Industry Regulatory Authority, also known as FINRA, runs 

, where you can find the regulatory history of any registered representative. 

For businesses, check major financial websites and news resources, such as the 

, and consult the Better Business Bureau to learn about complaints lodged against certain banks. The Securities and Exchange Commission and Federal Trade Commission also maintain updated information on financial institutions charged with violations. State websites can be helpful as well.

If you’re a Wells Fargo customer, contact the bank to make sure you aren’t affected and don’t have any open accounts you’re unaware of. If not, the best defense you have against this type of illegal activity is general vigilance. Get a free copy of your credit report each year from the three national credit reporting companies (Equifax, Experian, and TransUnion) at 

. Look in particular for any accounts you aren’t familiar with, even if they’re empty. 

One thing you shouldn’t do is bury your head in the sand, or bury your money in your mattress. While none may have an absolutely perfect record, the vast majority of financial professionals and institutions hold themselves to a very high standard and are held to high standards by regulators as well. 

The apparent fraud discovered at Wells Fargo should be instructive to everyone who uses financial services.

In the Wake of the Wells Fargo Malfeasance, Be Vigilant

We have often covered the pros and cons of working with an advisor. But just because you’re a dentist and most likely a higher earner (comparatively speaking) doesn’t mean you have to or necessarily want to work with a broker, analyst, or advisor. If you’d rather go it alone than work with someone on financial matters, there are a few things you can do to get and stay on track.

There are undoubtedly dentists who love to get into the nitty gritty of certain stocks and bonds, investment vehicles and strategies, growth funds and options, even hedge funds and corporate bonds. And that’s perfectly fine. For most, though, your busy career, running a practice, family obligations, and pursuing other interests may mean less time to focus on the specific investment strategies that might benefit your portfolio the most. 

The deeper you dive into the details of your investments, the more tinkering you may do, and you may ultimately find complexity creeping into your portfolio. If this is the case, think about simplifying. Three quick and easy ways to do this:

Look into investment vehicles that are themselves somewhat diversified, such as index funds or lifecycle funds.

Diversify yourself. I know it sounds odd to decrease complexity by diversifying, but by owning a variety of asset classes, you remove the need to constantly tinker with your investment mix and buy and sell along with the markets. 

Use the tools at your disposal to monitor your portfolio. Today’s retirement providers have management tools that are easy to use and understand. And there are software programs, such as FutureAdvisor and many others, that help you make sure your current investment portfolio avoids duplication, is tax efficient, and is in line with your investment objectives.

Having a basic understanding of different investment vehicles is a crucial part of establishing and pursuing your financial goals. Keep up-to-date information about what is going on in the world of finance with reputable sources, including 

 (which has a strong focus on international news), 

, and the resource I recommend most highly: 

Not everything you read will be of immediate use in managing your portfolio, but the better you understand the economic climate around you, the better positioned you’ll be to make adjustments as needed. 

Pay Close Attention to Fees, and Don’t Forget to Rebalance

Working without an advisor will save you some money for sure, but look closely at the transaction fees and any other fees charged by the brokerage service you select. And remember that few investments are truly “set and forget.” At least annually, you will want to review your portfolio and make any needed adjustments to make sure your portfolio is aligned with your investment goals.

Many dentists like the idea of managing their own money. It's certainly do-able. Here are some tips if you decide to go it alone.

What to Do If You Manage Your Money Without Hiring an Advisor

 of this series, we looked at four key considerations that can help you build your budget. While building the budget is a very important first step, maintaining the budget is what sets the best retirement savers apart from the others. 

Let’s take a look at four key steps to sticking to your budget.

It all sounds so simple, doesn’t it? How can you keep track of your budget without knowing what the actual spend was? But so many people ignore this key second step, and it’s why their budgeting process never really gets off the ground. A kept budget is one that is informed by actual spending is in a constant state of adjustment. While this may sound like tedious work, there are a million apps from banks and many other vendors that make this process very easy to automate. The majority of your expenses can be categorized right from one of these easy-to-use apps.

But it’s the fill-in-the blanks stuff that may be most eye-opening. Once you start keeping track, it may seem absurd that you spend $100 per month on coffee when you could spend a fraction of that by putting homemade coffee in a travel mug. As you begin to see patterns, not only will your budget improve, but you’ll be more likely to spy expenditures that aren’t necessarily in line with your financial goals.

 Yes, there are great budgeting tools out there from Quicken and many other sources that can be really helpful. They can break down your spending and savings goals into colorful charts and track your progress toward meeting savings goals. But none of them are absolutely necessary. A simple spreadsheet does the math for you. Heck, a pencil and pad can do the trick. Don’t let whatever system you’re using add a layer of complication, as this will likely make you think of budgeting as a chore rather than as a tool to help you meet your financial goals.

 The age of immediate internet and on-demand television has us all leading lives of instant gratification. But the need to have something right now often supersedes our long-term desire to save for a secure retirement. The key to resisting impulse buying is to set a waiting period for yourself. It can be a week, or even just 24 hours, but a brief time away from the item in question may immediately cool your desire to have it. 

Alternatively, if you do make an impulse purchase, don’t beat yourself up too badly about it. Remember, your retirement plan and your budgeting process are not there to serve as horrifying constraints. Over the long term, unless that purchase was a wildly expensive item, it won’t break your financial progress. 

The biggest problem with a long-term goal is that it seems so far away! Setting aside little amounts in any one income cycle won’t seem like it’s making a dent in your retirement number. The key is to set smaller, incremental goals you can hit each year. It’s an old truism that the shortest cashier line is the one that’s steadily moving, not the one that ultimately takes the least amount of time. Little bits of progress are measurable and will keep you motivated. 

Budgeting sounds simple -- and it is -- but only if you follow key rules.

Adding Some Glue to Your Budget

, we looked at how much you should set aside for your future self and the often-difficult balance between paying down debt and investing. In Part 2, let’s take a look at an often-overlooked aspect of budgeting and the one key factor that derails more budgets than any other.

3. How should my mortgage payments factor into my budget?

The question sounds mildly absurd, right? For dentists, like anyone else, paying a mortgage is likely to be the single biggest overall expense on your ledger. So, yes, it will play a huge role in any budget. But the reason the question is here is more about the long-term status of your mortgage. A mortgage is, by its nature, a long-term expense that will factor into every financial decision you make. Many smart investors choose to intentionally overpay their mortgage payment each month, noting that this will lead to big savings down the road. But many often struggle with whether it makes more sense to do this, or to put that “extra” money you might use for overpayments into your investments instead.

The decision is a tough one that has pros and cons. Paying down debt, when possible, is almost always a good idea. The same funds, invested in the stock market, for example, would be subject to market losses. But if you have a very favorable interest rate on your mortgage, the extra payments may ultimately save you less than an interest rate earned in a solid investment. As with all investing decisions, there are important trade-offs, so consider your strategy carefully before building these numbers into your budget.

4. How do I properly budget for miscellaneous expenses?

Miscellaneous expenses derail so many budgets. In fact, they’re often the reason retirement savers drop the budget altogether. If so many expenses defy a category, they seem to say, why bother with the budget at all?

Any good budget will have a “miscellaneous” category for all disparate expenses that come up in a given month or year. A target budget for miscellaneous expenses can be made by simply looking over purchases made over a few months’ time and calculating an average. Yes, there will be outlier months, like the time your car battery went kablooie on the same day that the water heater pooped out. Treat those months like the Olympics treats diving scores: throw out the highest and lowest months before taking your average. 

While it is entirely possible to break your budget by including too much of a line item for miscellaneous items, it’s more typically allocating too little for miscellany that gums up the works. Play around it with it a bit, and revisit your budget often.

Once you have a good budget in place, however, it’s rarely a case of “set it and forget it.” In part 3, we’ll look at ways to stay on track.

If you're putting together a budget, you may get tripped up with questions over how to deal with your mortgage payment and your unpredictable miscellaneous expenses. 

4 Questions for Every Budget, Part 2

A typical career arc for a dentist starts out slowly in terms of building income but picks up steam in the second decade, typically peaking in the third. During the first part of your career, when you’re likely paying down some debt and perhaps making big purchases such as a car or home, you innately understand the need for a sound budget. But if you’re like many, as your earnings increase, your desire to make and stick to a budget can begin to wane. 

This is a mistake, because the budget is the key building block for not just your current financial picture, but your future one as well. Over three parts, let’s take a look at 4 key questions that should inform any budget.

1. How much should I set aside for my future self?

This is a highly personal question with an almost endless number of variables, but since that answer isn’t very helpful, let’s instead look at some of the factors you should consider:

As we noted above, younger investors tend to have less to put toward future goals, so the older you get and the more you earn, the more you’ll want to start putting into investments.

 I’ve always thought of this as a strange term, because “disposable” connotes something you’re throwing away, and investing is typically the opposite of throwing money away. But what is meant by disposable income is simply what’s left over after your monthly expenses have been subtracted from your monthly income. This can also be called “discretionary” income, and that term makes more sense, as your discretion should tell you to sock much of it away!

 Discretionary income may be an easy number of figure out, but on its own it isn’t very informative regarding what types of investments you should consider. That’s because your need to access your money will vary heavily depending on your individual circumstances. For instance, if you have five young adult daughters, or three college-bound youngsters, you may need access to your money more than a dentist who doesn’t have children. Needing liquid funds means you’ll have less to put away for future needs.

All of these considerations will factor into your budget, so make sure you have assessed both your current financial situation and your future goals.

2. How do I balance investing with paying down debt? 

The answer to this question will depend largely on not only how much debt you have, but what kind of debt you have. Not all debts are owed equally! Student loan debt, while an albatross to many a young dentist, is generally not bad debt, because it typically has a very low rate of interest. Credit card debt, on the other hand, often carries a very high rate of interest—sometimes shockingly high. 

When building your budget, allocate more money to high-interest debt. In fact, allocate a lot more money to high-interest debt, and pay the minimums on your low-interest debt until it’s paid off. 

But even while paying off debt, it can’t hurt to at least pay yourself a little something, even if the amount seems tragically small. Why? Because of investor inertia [add link to last week’s investor inertia article]. Getting into “investment motion” will make it much more likely that you’ll stay in motion.

In Part 2, we’ll look at how to tackle a mortgage and the bane of many budgets: how to deal with miscellaneous expenses. In Part 3, we’ll look at how you can stay on track once you’ve established your budget.

Budgets aren't always fun, but they're a good way to organize your spending. Use these questions to guide you as you draft a budget.

4 Questions for Every Budget, Part I

 of this three-part series about online security, we looked briefly at online scams. In 

, we discussed limiting email spam. Now, let’s take a look at what to do if you’ve been targeted. While the action you need to take will depend a little bit on the specific situation, there are some universal steps that will almost always be included in stopping online malfeasance once you’ve been targeted.

 As soon as you become aware that something is amiss, make a phone call to any legitimate enterprises that may unwittingly be a party to the scam. Even online leaders like PayPal and reputable companies like Starbucks have been used unwittingly in scams, but they have policies that can make you whole if they are used in some way to bilk you out of money. Scammers will sometimes float a trial balloon for a small amount to see if any immediate action is taken to close the loophole. If not, you’re putting out a welcome mat for access to your accounts or personal information.

The security breach may not be limited to one account or one vendor. Scour your statements and look for other transactions that may be fraudulent. Notify others who share your accounts about the breach, and make sure they are following good identify protection procedures.   

3. Change passwords, and, if necessary, close accounts. 

In many cases involving an online security breach, your log-in and password have been compromised. If you use the same password across multiple log-ins: first of all, don’t. Second, change each, and make the password unique to each account. 

Closing your account may not be necessary, and doing so can be a pain, particularly if it’s an account tied to a number of automatic transfers or withdrawals. Talk to your bank, credit card company, or online vendor to find out their policies and let them know about the situation. They may also have some recommendations; just be careful that those recommendations suit you and not solely the business you’re interacting with. Suspended accounts can be re-opened as soon as you’re comfortable that the risk has passed. 

 If you’ve been a victim of some online malfeasance, you can help others avoid the same fate and raise awareness about the scam. You can file a complaint with the Better Business Bureau 

. You can also notify the National Fraud Information Center 

, a long-standing national non-profit dedicated stopping fraud online and otherwise.  

Online scams are common, and they can be dangerous. Many people have lost a great deal of their savings and online privacy through the malfeasance of others. But vigilance, good password protection, and taking immediate action to address the scam or spam is a solid defense strategy. Following these practices will make you a much more difficult target.

There are many steps you can take to help prevent an internet scam. But if it happens to you, take these four steps to recover as quickly as possible.