It’s the age-old question with many different answers: how much money do I need for retirement? Dentists face no more investment and savings risks than other people; however, as dentists also tend to earn more money throughout their career, and high-income earners tend to spend more and thus, have a higher cost of living. This means more money is needed for a comfortable retirement.
To figure out a number, aside from talking to an investment advisor and dental CPA, a good place to start is by looking at the target retirement age. In 2017, the average retirement age for dentists was 68.9 years old, according to the ADA Health Policy Institute. No one knows for sure how long retirement will last, but current estimates put life expectancy at about 80 years; doctors tend to live longer, and of course personal health, habits, and family history will factor in, too.
The point is that the money you have at retirement needs to last as long as you are retired, whether that is 20 years, 30 years, or more. A recent study found that about 25 percent of doctors have less than $1 million in net worth, which is troubling considering that people are living longer and some expenses, like health care, are rising every year. Use the years before retirement to make sure you’re among the doctors and dentists with more than that amount – without factoring in your practice sale.
Next, examine current spending and lifestyle. Add up all the expenses in bank statements and credit card accounts to get an estimated number. Factor in expenses that are temporary and how long you’ll have them, like a mortgage, student loans, or daycare. Retirement expenses won’t be the same, but many dentists mistakenly assume that spending in retirement will be lower. Sometimes it’s higher, if your goals are to travel more.
Healthcare costs in retirement can greatly fluctuate between $5,000 a year or $50,000 and higher, for long-term care. In today’s dollars, a retired couple will need about $285,000 for retirement health care expenses. That number doesn’t include long-term care and is based on a retirement age of 65.
After expenses and spending patterns, consider income streams in retirement. Even Social Security can make a difference, even for retiring dentists who aren’t relying on it to cover any major expenses. Balance the types of income streams with tax obligations. Remember that Social Security is taxed differently if you’re collecting on it but still working part-time, among other scenarios.
Next, look at your risk tolerance for investments. Lower risk tolerances translate to a nest egg of around 30 percent of total retirement spending needs; the practice sale can be a part of this plan but should not be the only asset in play. Inflation is also part of the calculation and one that we won’t address here except to say that it plays a more critical role in younger dentists’ retirement plans than dentists who are within a few years of retirement.
Current research supports spending about four percent of retirement assets per year for a retirement of 30 years or less and increasing that amount as needs change. Dentists with shorter retirements and/or an investment portfolio that is considered high-risk could withdraw up to five percent annually. Based on these projections and considering the other factors we mentioned here, you can do some basic math to arrive at a ballpark number for what your retirement may need.
If you find that an early (or on time) retirement isn’t possible yet, look at the annual spending again and think about which areas can be reduced or eliminated, like cleaning services or extra TV packages. And once you hit age 50, consider taking advantage of the additional catch-up contributions to retirement accounts in addition to maxing out other retirement plan contributions.
Dentists at any stage of their career can start retirement planning. Practice owners who don’t plan to retire for many years have time on their side and can utilize several advance planning tools for their eventual transition out of dentistry. Practice owners who plan to retire within five years should be assessing current practice performance and starting the transition plan now. No matter your situation, a dental broker with the support of experienced dental CPAs can help with planning. Contact N/L Transitions to find out more.