Starting a new dental practice, or expanding to multiple locations, can take time, effort and substantial funds. However, it shouldn’t delay or derail the necessity of saving for retirement. For dentists, like other entrepreneurs and small business owners, retirement can represent a level of financial independence defined by the ability to sell or walk away from your business and live comfortably off the efforts of all of your hard work. Steps to achieving your financial goals requires solid financial planning.
Importance of Financial Planning
Working with a financial advisor to develop your financial plan will help to identify and attain the goals that are important to you now, as well as for the future. The process involves evaluating your entire financial picture and outlining strategies tailored to achieve these goals with your available resources. A financial plan serves as a framework for organizing all the pieces of your financial picture.
As your life and dentistry career evolves, so should your financial plan. Some common issues dentists encounter include investing in new technology or equipment, hiring an associate, growing their team, buying additional practice locations, selling their practice(s), transitioning wealth and planning their estate.
A financial advisor can help you assess your current and future situation in four key areas, including:
For each of these key areas of financial planning, dentists should consider these important sub-components.
Assess Your Current and Future Financial Situation
Strategic Use of Debt in Your Dental Practice
Building financial independence can come from careful use—and eventual elimination—of debt. Student loans or capital financing to start your dental practice are some of the first investments you make in your future financial independence.
Your first decision as you begin to earn income will be whether to save or spend. “Saving” includes deciding whether to pay down debt, redeploy the cash into the business, or seek potential better returns by other means, such as investments in marketable securities. Each option helps promote your eventual goal of financial independence.
Investing in yourself or your business through debt is a powerful tool for building your financial independence. Don’t make the mistake of over-simplifying this equation by looking only at interest rates. Incurring debt, regardless of the immediate purpose, should only be taken on if it enables you as the business owner to generate income more than the net cost of that debt.
Evaluating the net cost of debt includes evaluating the interest rate, the risk or additional cost of default and the tax impact of maintaining the debt. Seeking the proper source of debt, such as subsidized student loans or preferential small business loans, can reduce the net cost through reduced interest rates and favorable default terms. Working with a tax advisor can reduce the net cost by helping you take advantage of possible tax incentives associated with the particular type of loan. Consider working closely with loan officers, tax advisors and financial advisors to help you understand the true cost of your debt.
While you remain focused on treating your patients and growing your dental practice, let us work on helping you achieve your financial goals.
Saving for Short to Long-Term Goals
As your income grows, you will be faced with new savings opportunities. There are many options for dentists to set funds aside outside of the business for future use. The first step is identifying the specific future use, such as protection against unexpected costs, short term savings for personal use like buying a home, mid-term goals like saving for a child’s education or long-term use like saving for your own retirement.
Short-term goals require flexibility and accessibility, often referred to as liquidity, along with minimal principal risk. The trade-off for low risk is low growth. Longer-term goals are achieved with the help of obtaining growth for the risk you are willing to take in investing those funds. Over-allocating to your short-term goals can cost you growth. Over-allocating to your long-term goals can mean painful early withdrawal penalties (illiquidity) or poor returns caused by bad investment timing (risk).
Tax Deferred Savings
After identifying the intended future use, you may be able to obtain additional “growth” by reducing the cost of taxes associated with the savings vehicle. There are many strategies available to business owners to defer income taxes by saving into retirement-focused strategies, such as 401(k)s, IRAs, pension plans etc. There may be ways to avoid taxes on future growth entirely through the use of Roth IRAs or Roth 401ks.
The right strategy for you will depend on many factors, including the cash flow of the business, the number and compensation of employees and the structure of the business ownership. Other savings vehicles with individual tax benefits may be available for different goals, such as 529 college savings plans or health savings accounts. Lastly, the investments outside of a dedicated savings vehicle may have their own tax benefits, such as utilizing municipal bond income, holding assets long enough to receive long-term capital gains treatment or the benefits of qualified dividends.
Path to Financial Independence
There are various paths you can take to achieve your financial goals. In addition to the many ways you can choose to use your hard-earned income, there are different speeds you can take to reach financial independence, based on your level of risk comfort.
It’s also important to remember that an integrated wealth plan is more than just money; it’s about your core values and what your wealth can help you accomplish for yourself and others.
The right path will be different for each business owner based on the balance of options like debt financing terms, opportunities to reinvest within your practice or savings strategies outside of your practice.
Moreover, your goals, options and resources will continue to evolve over time. The most successful dental practice owners recognize the need for an individualized plan, are willing to adapt and make the most of their team of advisors, which may include family, friends and mentors, as well as tax advisors, financial planners and investment professionals.
Customizing your integrated financial plan will involve assessing:
A solid wealth plan starts with a clear understanding of your assets, your investments and how they affect each other. Once you have a picture of your current financial situation, you can better predict what you’ll need to accomplish your goals. The complexity of wealth planning (taxes, investments, business valuations, etc.) can be simplified by working with the proper professionals – tax advisors, wealth planners, business and financial advisors and valuation analysts.
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