What if I Want to Keep Working in my Dental Practice Past My Planned Retirement?

The big “R” word: Retirement. While some dentists can’t wait for the day that they can put down the dental drill and ultrasonic scaler, many find it hard to imagine not being chairside. While some of these more retirement-reticent dentists choose not to retire for financial reasons, for many it’s inspired by more personal reasons.

“Retiring can be a tricky thing,” says Matthew White, cofounder of White & McGowan, a financial firm that specializes in strategies for dentists and physicians. “Being a dentist is an identity thing. You’re known as doctor in your community and it’s the way people identify you. You’re held in a certain regard because of your status as a doctor; you’re the person they come to with questions or to have pain taken care of. So, who are you outside of that?”

Because dentists work such incredibly long hours and the career can be so life-consuming (often leaving them little time to develop hobbies or interests outside of work), many times it is difficult to walk away, because there may be nothing to move toward that’s better than what they are moving away from. Compound that with financial concerns, and you may find dentists in the operatory well past retirement age. So how can dentists prepare for the eventual transition in a manner that leaves them the flexibility to decide whether or not to retire—or carry-on practicing—when the time is right.

“You’ve got to have a retirement plan,” says Bruce Bryen, CPA, CVA, dental practice valuation analyst at Baratz & Associates. “Dentists used to push back against it, or not think it was worth it. But I think if you start talking about retirement plans now, people pay attention to it because nowadays they understand what retirement plans are and everybody wants one.”

With a retirement plan and an exit strategy in place, dentists can be prepared to depart from the field whenever they want—even if it may be past the typical timeline.

“An exit strategy is critical to a successful retirement for the dentist,” White says. “Because they do reinvest so much in their businesses over time. They typically do start out with a larger debt load because they often buy a practice instead of starting one. They’re investing a lot of money and time into that business and they need to turn that into a significant retirement asset at some point. So, they need to have an exit strategy in place to do that.”

The First Step is to Plan Ahead

Today, dentists—particularly practice owners—are generally financially savvy professionals who are prepared for retirement.

“I would say that because a dentist is going into business for themselves and running a business, they tend to be a little more mindful of financial planning,” White says. “They have to look at what needs to be done.

“But, they may not start out that way as a young resident or somebody coming out as a young associate,” White continues, “They just aren’t thinking about it then. At the point that you transition into your own practice, into being a business owner, you can't ignore the numbers anymore. You can't ignore planning, you can't ignore organization, risk management, human resources—you know, those all become a part of your life and when that starts to happen, you see them take more interest in financial planning for themselves.”

Even if your financial plan is ironclad, if you end up working past that planned retirement, everything can change.

“You think that working longer automatically means more money, but that’s not necessarily true,” White says. “In some cases, it works out where it's better financially for them to retire early. For some, staying in the game too long can have financial repercussions.”

This seems counterintuitive, but it all boils down to the 1 thing that everyone dreads: Taxes.

“The way it works is that you have required minimum distributions if you have saved money in pre-tax retirement tools your entire life,” White explains. “You are going to have required minimum distributions starting in your 70s. And those distributions are going to come to you whether you want them or not, and be taxable to you whether you want them to be or not. If you are working at that point, it is now taxable at the highest marginal tax rate, because it’s added to the existing income that you’re making at your practice.”

In contrast, if you weren’t working in your practice any more at the point where the minimum distributions were taking place, you would be taxed at a smaller amount. And the dentists who have been planning ahead, being responsible, and making continuous contributions their entire career will be hit the hardest. Since these significant contributions are added on top of the income the dentist is currently making, these clinicians are paying unnecessary taxes at an unnecessarily high tax rate on top of the current income.

“From a tax planning standpoint, you saved all of that money, pre-tax twenty years ago, to avoid taxes at a high marginal tax rate,” White says. “And here you are during your peak income years, really paying at a tax rate that may be higher than the one you avoided initially. That doesn’t make sense. You almost would have been better off just paying taxes 20 years ago when your income was lower and you had a lower tax rate.”

“Basically,” White summarizes, “you’re now working against yourself.”

There are ways around this scenario for dentists that know they will want to continue working past that age. White advises that being aware of required minimum distribution timelines—and planning accordingly—can make a difference. For example, he encourages dentists to start planning 10 years out.

“If you’re planning in advance, you can begin making advantageous changes,” White says. “For example, it might be good if you had some years before the point where the required minimum contributions take place where you showed no income. We can convert some of your 401K and profit-sharing pre-tax money during those years into a Roth IRA. And we can go ahead and pay taxes on it at a lower income in those years where you don't have any income prior to those required minimum distributions happening.”

By going ahead and getting the money into the Roth IRA and paying taxes on this in advance before the required minimum distributions come into play, the money is able to grow tax-free from that point forward. And, White emphasizes, there is no required minimum distribution on a Roth IRA, which allows the money—that the clinician may not need for a long time if they are postponing retirement—to grow tax-free, and while they pay taxes on it during the years where they didn't have an income.

In the end, the dentist will pay a lesser amount of taxes, leaving them with more money.

Plan Ahead for Your Practice Too

If you’re considering working past your planned retirement, the “planned” part is key for not only your future, but that of your practice. Once you’ve got the financial plan sorted out for your personal finances, you’ll need to consider your practice. A well-defined plan for eventual retirement—or a scaling back of your work—can make a big difference when it does come time to retire and transition your practice (whenever that may be). To be successful in this financial planning means understanding your options, the value of your practice, and what working longer can mean for that valuation.

“The big difference for dentists from other professions is that when they retire, they have a sellable asset,” White says. “And some dentists don’t know the value of that asset and they don’t know how to optimize a clinic to make it worth more at the point of sale.”

Figuring out how to optimize this can be critical.

“Dentists should do everything they can to work as hard as they can to create as much revenue as they can,” Bryen advises. “Because in valuation, most buyers are looking at gross revenue. And you want your gross revenue to be as much as it can be, and the way you’re doing that is by working and creating more revenue.”

This doesn’t happen overnight. Once again, White stresses that foresight is key to success.

“You should be preparing at least 10 years in advance, because these things can take a while,” White says. “Obviously, your valuation can change a lot in 10 years, but I would at least begin identifying who your purchaser is going to be. Is it going to be a large DSO or are you not interested in handing this off to a big corporation, and want to sell it to another private dentist similar to you? It may take time to weigh those options.

“About 5 years out, you need to start discussing contracts and start having your initial evaluations,” White continues. “I would have a third party do those valuations so that you’re getting a proper and fair evaluation.”

White also cautions that waiting too long to sell could have repercussions for the practice value. Selling your business is a part of retirement planning and it’s not something you want to wake up and start 1 morning in your seventies.

“If you wait too long, you’re going to have to do a fire sale,” White says, “The last thing you want to do is to be in a situation where you’re in a hurry and you have to sell an asset for less than it is worth. And be assured that the DSO or private equity group that’s negotiating with you will notice this, and if you’ve waited too long, you’ll have no choice but to negotiate with them. I say begin the discussion in your early or mid-60s so you can find the right buyer at the right price. Then if you want to keep working, it’s up to you."

Preparing for the Transition

Whether or not you’re planning on staying on, once you’ve sorted out your timeline for your practice sale you need to make your practice as appealing as possible to potential buyers.

“You may want to increase your marketing budget during the last year or 2 before you’re ready to put the practice on the market,” Bryen says. “You’ll want to watch your expenses and get them as low as you can so your profit is as high as it can, because profit margin is another method used in a formal valuation to say how much a practice is worth.”

Making your practice attractive to new patients is just 1 side of the coin: It also needs to be attractive to potential buyers.

“Having state-of-the-art equipment is important,” Bryen adds. “If you have a lot of old equipment, an evaluator is going to say, ‘you’ve got all this old equipment that is going to have to be replaced, so the buyer will have to spend money on equipment, so we’re going to reduce our offer substantially.’ Bottom line, you want good, new equipment and you want the place to look good.”

When your practice has been made its most appealing and you’ve got a buyer nailed down, there’s still the matter of sorting out where to go from there. A slow handover can be a good transition that can allow you to continue to working while also phasing out.

“One way that you increase the value of your practice is by continuing to work for a couple years with that new partner,” White says. “And so it may be that the sale takes place before you finish working. It's often more valuable to someone if you will stay around during the transition and make sure patients are still seeing your face and your name on the door, even though the business has technically changed hands.”

White recommends a “dating period” while the transition is underway. By identifying a partner or DSO or private equity group but then maintaining majority stake for a few years, you can figure out if the relationship will work.

“Sometimes the initial successful plan may not work out,” White says. “So, give it a slow try, and if it seems like it works, then you can be happy to hand over the keys. But, having that dating relationship initially before everything is signed and done can be helpful and avoid some headaches down the road, especially if the new partner or group is expecting you to stay on for several years. Because you may find that post sale, the relationship isn’t working and it may be difficulty, but you’re contractually committed to be there for 2 or 3 years.”

Being aware of this possibility and determining if that’s something you want to agree to—or if you want to take a different approach for a transition can help you decide if you want to continue to work, or pass the practice off entirely. By starting a gradual transition, you can evaluate what’s best for you before there’s a contract in place that requires you to hand it off.

“The dentist can only make up their mind if they have all the information and know everything,” Bryen says. “If you have the information, you can decide whether or not you are willing to take the risk or make a certain decision about a practice sale or retirement.”