Using Your Dental Practice as an Anchor for Retirement Savings

Your short-term goals for your dental practice shouldn't come at the expense of your long-term goals for life and your retirement. There are many ways you can leverage your dental practice for your retirement—and we spoke to the experts to find out how.

The Sooner, the Better, But It's Never Too Late

Bruce Bryen, CPA, CVA, says dental practice owners should know building the value is a long game, and the earlier you start, the better. As soon as you can afford it, offer retirement savings as an employer-sponsored qualified retirement plan to yourself and your employees.

"But the practice itself is the base for getting it started," Bryen explains. "If you're a dentist under 50, there are retirement plans I would recommend that come right off the top of the practice with contributions. These plans help key personnel build up money for retirement. But every year, it's coming directly from the practice."

However, it's never too late to start. For example, suppose a dentist is over 50 and hasn't planned for retirement. Bryen says that programs that use the dental practice as the base allow more contributions per year for people over 60 to "catch up" their retirement savings.

"That's the goose that lays the golden egg, where all the money is going to come from, " Bryen says of the dental practice.

Mark Hyman, DDS, MAGD, an Adjunct Full Professor and Special Assistant to the Office of the Dean at UNC Adams School of Dentistry, agrees young dentists should learn to pay themselves first. He recalls the Albert Einstein quote, "Compound interest is the eighth wonder of the world. He who understands it earns it … he who doesn't… pays it."

Dr Hyman has always put away funds for retirement, even as a dental resident in 1984. When he started his private practice in North Carolina, he started a 401k and fully funded it every year he was in practice. He highly recommends that for his dental colleagues.

"That yields a feeling of liberation," Dr Hyman says. "What I wish for my colleagues is that feeling of security."

So, How Much Do You Put Away?

The ADA published a supplement to the ADA News in January 2021 with Alex Macielak from Laurel Road, a student loan refinancing company, that recommends using the 50/30/20 rule. Macielak writes that half a dentist's income should cover necessities, 30 percent should be discretionary items, and 20 percent to savings, including retirement savings. The savings should come before the discretionary spending.¹

Macielak also explains compound interest and how it accumulates assets for retirement using the Rule of 72. The Rule of 72 determines how long it takes to double your money by dividing 72 by the interest rate. So, if the interest rate is six percent, it will take 12 years to double your money. However, as Macielak points out, a credit card at 18 percent interest will only take four years to double your debt.¹

Bryen says another important consideration for how much to put away is your age. Statutes limit how much people can put away under 50 vs. over 50:

• People under 50 have defined contribution plans, which means you cannot put away more than a specific amount each year for retirement
• People over 50 switch to a defined benefit plan, which uses the benefit you expect to get from the program to calculate what you can contribute.

These defined benefit plans are what Bryen describes as favored treatment because you can contribute much more to retirement than you can with a defined contribution plan. For example, regarding 401k contributions for 2022, the AARP says:²

• People up to age 49 can contribute $20,500
• People 50 and over can add in another $6,500 as a catch-up contribution.

Also, how much you and your employer can contribute to a defined contribution plan is limited. People under 49 can put away $61,000 and people 50 or older can contribute $67,500.²

Bryen says using the practice for retirement savings has 2 enormous benefits to the dentist. First, it gives practice owners an excellent annual tax write-off while working. Second, the value of the retirement plan, which you have been writing off from the gross profits every year for taxes, gets added back into the valuation of the practice when you sell.

"You get a nice multiple for the dental practice itself because even though you're writing off the retirement plan payments while working, they all get added back when you evaluate the practice," Bryen says. "It's a fantastic thing, and it all starts with the dental practice."

Invest in Your Practice's Most Valuable Asset, Yourself

Warren Buffett once said, "never invest in a business you cannot understand." Dr Hyman encourages dentists to invest in their dental careers instead of restaurants, real estate deals, or non-fungible tokens (NFTs). Investments in dental careers pay off better in the long run.

"Offer something worth paying for to your patient," Dr Hyman says.

Dr Hyman says that setting a continuing education goal and investing in training means dentists can be more talented, valued, and accepted. He also recommends investing in coaching. Jameson Marketing and Management was a significant investment per year for Dr Hyman, which he recognizes that some dentists consider too expensive. However, his response is, "Compared to what?" The skills and philosophy Dr Hyman learned and implemented from that investment at Jameson grew his private practice by $500,000 in 24 months.

“And we continued to grow every year after that,” Dr Hyman says.

In addition to investing in your skills and dental practice management approach, Dr Hyman encourages dentists to use technology to increase productivity and treatment acceptance.

For example, the Isolite® (Zyris) can reduce the time on your procedures while you take great care of your patients. In addition, having a DigiDoc Intraoral Camera System in the operatory makes it easier to show patients what you see in the mouth and get them on board with the treatment plan.

Simple changes can transform your practice and add revenue you can use to pay off the debt or increase what you put away for later. For example, using these methods, if you add only $500 a day and work 200 days a year, that's $100,000 more a year to your bottom line, Dr. Hyman explains.

"Work efficiently and effectively, collect what you produce, and don't spend it all," Dr Hyman says. "You get more education, work with coaches to build confidence, and buy good equipment. That's the wise investment."

Maximizing the Value of Your Dental Practice for Sale

Of course, the dental practice sale is also a significant part of the retirement plan. Bryen says that to maximize the dental practice's value, dentists should consider a few things, having evaluated over 1,000 dental practice valuations in his career. It starts with the gross revenue. If buyers have to finance the practice purchase, banks need to see at least 5 years' financial statements from that practice. Banks want to see that uptick in revenue, Bryen says.

"The virus hindered many dental practices and decreased values," Bryen says. "But since there was a good explanation, people tended not to put that much emphasis on that year."

Part of the way 2020 gets de-emphasized is by using a weighted average of gross revenue and net revenue to determine the Fair Market Value of the practice. If 2020 is the only year that drops in revenue, that is still attractive to lenders. But if 2021 is still down, that could be a problem.

"So, get your gross revenue up," Bryen says.

Austin Lee, a member of XY Planning Network, a financial platform for advisers to serve Gen X. and Gen Y, says it is critical to plan when it comes to the dental practice as an anchor for retirement savings. Since valuations use a multiple of net cash flow to calculate, Lee says you need to maximize that by increasing revenue or decreasing expenses. For example, to improve the patient base and revenue, a dentist might need to add more staff to see more patients. Lee says that another way to increase revenue is to specialize in high-end treatment, like implants or clear aligner orthodontics, or add more comprehensive care exams.

"Yes, it does involve some expense for capital investments, but, ultimately, you'll see a positive ROI on it," Lee says.

Bryen explains several ways to reduce expenses with sound practice management tactics. For example, avoid overtime, enforce production goals for the team, provide only the benefits the practice can afford, manage supply costs, prevent inventory overstocks, and keep away from last-minute equipment purchases. But, perhaps most importantly, Bryen agrees, is to have a plan.

"Start working on the plan years in advance since your evaluation is supposed to be for 5 years, and start working on this evaluation a year before you think about selling," Bryen says.

On the expense side, Lee thinks joining a buying group could lower prices on supplies with the discounts the group can leverage. He also suggests hiring a consultant for the business side of the practice can find more ways to streamline expenses and create efficiencies. For example, the consultant might indicate if you have chairs open, hire another hygienist so you can see more patients in a day. However, it requires a different mindset, Lee says.

"Having a mindset of investment and making sure the money you're spending will help you run the business is an investment opposed to an expense, even the consumable items. You need those items to run your business," Lee says. "So, try not to see things in a vacuum. It's better to see the big picture, which is, 'How does this expense ultimately help you in the end?'"

Bryen says that investing in equipment that facilitates a digital workflow is necessary to optimize the valuation when you sell. Otherwise, you could find yourself getting a lower-than-expected offer.

However, there are ways to invest in the equipment that makes fiscal sense. For example, Bryen recommends a leasing process to make this transition cost-efficient. Leasing allows dentists to benefit from using the equipment without paying for the residual value. Also, since technology changes so fast, the lessor will often let go of the equipment inexpensively at the term's end.

"If you don't put it in yourself, you will get less of a price when you sell the practice. The buyer will have to put it in, and that money has to come from somewhere," Bryen explains. "You've got to be in the 21st century."

The Most Significant Mistakes You Can Make Regarding Your Retirement

Lee thinks 4 common mistakes can lead to problems with a dentist's retirement strategy using the practice as an anchor, which includes:

1. Not tracking what you spend: Lee says you can't fix what you don't' measure, so audit your spending and hold yourself accountable. By living within your means and paying off debt, you can devote more to retirement savings.
2. Paying off debt without a strategy: While paying off debt is essential, there should be a plan. For example, Lee says refinancing or paying off high-interest debt is always a good strategy, but spending down cash reserves isn't sometimes. Instead, leveraging that cash for an equipment expense is a better business strategy. Lee says maintaining a debt of 15-20 percent of income frees up money to give you flexibility.
3. Not having an investment program established: Lee recommends investing 10-20 percent of income to a ROTH IRA or 401k on an automated contribution plan.
4. Making uninformed financial decisions: Lee suggests getting help from a financial advisor that knows the right questions to ask and helps you set realistic goals for your retirement.

Bryen thinks the biggest mistake a dental practice owner can make is to do nothing. Even a SIMPLE IRA, which has a 2022 contribution limit of $14,000, is something. As Bryen points out, contributing $14,000 to a SIMPLE IRA over 35 years can add up to $490,000, not counting appreciation or increases in contribution limits.

Not hiring a dental-specific CPA is another mistake Bryen sees. Bryen says many CPAs don't understand dentistry vs. an inventory-led business, so they can't give you optimal advice.

Bryen also says that too many practice owners do not understand the non-clinical work—and that's where a lot of money is lost. Not spending time on administrative matters like healthcare, insurance, and everything you need in your practice is a significant mistake.

"Reading articles, attending seminars, and talking to the dental CPA is essential," Bryen explains.

Dr Hyman says every dentist should avoid excessive debt (debt for advanced education or equipment to enhance care is another story). The interest is crippling to a dentist's future. Dr Hyman says the banks are happy to lend you money, but a life with disciplined spending is the key to the financial freedom that he wants dentists to enjoy. If you want a second house or to send your kids to private school, or any of those other expenses, Dr Hyman says that's fine, with a caveat.

"Pay cash for it," Dr Hyman says.

Not offering retirement plans for employees because it costs too much money is another mistake Dr Hyman sees dental practices make. He says that investing in your team contributes to less turnover, adding that every team member you lose is like losing another year's salary. In addition, a happy and engaged team builds patient trust and leads to a higher level of case acceptance.

"One expression from the Dale Carnegie organization is, 'We buy from people we know, like, and trust,'" Dr Hyman says. "If you do this for your practice, you will get people paying their bill with appreciation. If you live a sensible lifestyle and invest early and assertively, not aggressively, you can put yourself in a tremendous position of security and comfort for your family. That's what I wish for the next generation of dentists."

"Over a multi-decade dental career, you'll gross multi-millions of dollars," Dr Hyman continues. "How much are you going to keep?"

References

1. Macielak A. Financial Foundation for the New Dentist. Ada.org. Published 2021. Accessed April 8, 2022. https://www.ada.org/-/media/project/ada-organization/ada/ada-org/files/resources/students/2020-21_dps_laurelroad_0107r1.pdf?rev=b1c9a77d31414214aa7cfcb920f7d9b0&hash=A974DAFAF1931678A898A9069503AFA5.

2. Waggoner J. How Much Can You Contribute to Your 401K in 2022?. aarp.org. Published 2021. Accessed April 19, 2022. https://www.aarp.org/retirement/planning-for-retirement/info-2021/401k-contribution limits.html#:~:text=There%20is%20an%20upper%20limit,up%20from%20%2464%2C500%20in%202021.