The average dentist in the United States, over 40 yrs. old, saved about $28,205 per year for retirement in 2010. True or False? Keep your answer to yourself, no looking at your neighbor’s paper, and keep your eyes up front. We’ll come back to the quiz in a minute.
The retirement planners of the previous generation often used the analogy of the reliable “three legged stool” when speaking about retirement savings. A couple days ago in the news there was an article about how retirement planning is a whole new world when compared with the reliable three-legged stool that propped up the World War II generation. The author suggested that many older Americans “relied on Social Security, pension plans, and personal savings – like three legs to a stool. These folks would stop working and have guaranteed income.” I think of my Dad. He had the same job for 35 years with one of those “big, all-American” car companies that was used to taking good care of their own. Pension plans could be counted on then. Times have changed and it’s even tougher for the dentist to build a great retirement in many ways.
The risk to save more has shifted to individuals at a time when we are living longer. Dentists that find they have not saved enough each year must deal with a complicated new strategy that combines catching up on savings and crafting a transition that fits into the financial plan seamlessly. Let’s look at each leg of this fabled stool individually to understand why it can’t support the weight of an America that is bulging at the waist – woefully un-prepared for a healthy dental retirement.
1. Social security will mean less each year. In 2016, the Social Security Administration will begin paying more in benefits than they collect in taxes. Were you aware that without changes, the Social Security Trust Fund will be exhausted by 2037 and there will be enough money to pay only about 76 cents for each dollar of scheduled benefits? Even more shocking recent news reports state that the Social Security Administration has already started the bleeding. They will pay more in benefits than they collected in taxes in 2010 – six years ahead of the government’s 2016 prediction.
2. Pension Plans will be extinct. A hard-scrabble, blue-collar America could always rely on a private or government backed classic Pension Plan to give them ease after decades of hard labor. We all know private plans have failed left and right, and many more companies have just discontinued their plans without much warning – or drastically cut the plans they promised. To add insult to injury, the Pension Benefit Guaranty Corporation – the government backup for failed plans – is massively underfunded by billions and billions of dollars. Now, even state and local government plans are at risk of collapse. In fact, a recent study conducted by Joshua Rauh of Northwestern University basically said 45 out of 50 state pension plans were at risk of failing in the next 10 to 20 years. So much for that safety net.
3. Savings rates are terrible – but improving. My previous blog about the Financial Revolution in Dentistry spoke of how Americans are – and will continue – to save more money each year. The ADA 2010 Survey on Retirement and Investments in dentistry reveals some interesting data that supports my opinion that savings is weak. Members can judge for themselves at http://www.ada.org/goto/surveyresearch. The survey claims:
- dentists 35-44 save 16.3% of net income (about 9.8% of gross income at a 40% tax rate)
- dentists 45-54 save 20.8% of net income (about 12.5% of gross income at a 40% tax rate)
There are two significant problems with this. First, the ADA sent the survey to 11,998 dentists in April 2010. By the end of the month 704 responded – a 6.6% response rate. Why didn’t the other 11,294 dentists comment? Because they are too busy trying to figure out how to save more for retirement and don’t have time for surveys or were too embarrassed to respond. It’s my opinion that respondents are likely those that are saving a respectable amount for retirement and are proud to share it. Second, many dentists believe they save more than they actually do. There is a little bit of having one’s “head in the sand” here.
It’s my opinion that the survey doesn’t accurately reflect the realistic dental landscape – income needed at retirement is understated and the large majority of dentists save far less than 17.3% of net income, as the survey suggests is typical.
Average gross income for the general practitioner dentist in 2010 was $258,520 – $271,730 for those over 40. The survey data on this demographic suggests we should see savings of 17.3% of net, or $28,205 per year, when you back out 40% for taxes, etc. If you answered “True” to the pop quiz, you win an endless supply of this blog. Don’t get too excited, you’ll wake the neighbors.
Regardless of whether you are saving a little more or a little less, the ADA data suggests that all dentists are in the same boat. The average income expected by the dentist at retirement is 49% of current income – or $127,000 expected per year – according to those surveyed. What a shame a dentist has to cut income at retirement in half and think that is normal or it has to be that way.
Why is it that a dentist thinks they have to accept “average”retirement savings when they haven’t been average their entire life: the best grades, the highest achievers, the most education, the higher-than average income and lifestyle . . . then settle for half their current income in retirement. Really? In order to meet income requirements in retirement that we believe our clients deserve, a dentist should save 30 to 34% of what goes home – 1/3 of net income each year. If you think that is unrealistic, don’t take my word for it, listen to those dentists in this Video Library saving that much on a regular basis.
Laura Carstensen studies the longevity of people’s lives at Stanford University and says:,
“As humans, we decide how we are supposed to act by watching the crowd. For retirement, many look at what their parents have done and don’t realize that everything has changed. People need a new infrastructure that helps them know what to do and makes it automatic and invisible and a little bit at a time”.
The recession has shaken dentists up and made the reality of retirement planning even more difficult. The “three-legged stool” doesn’t exist any more. Dentists will flock back into the market in an effort to make up for losses incurred in recent years and will likely take unnecessary risk – with high expense – as a result. This approach needs to be balanced with a greater emphasis on increasing savings. Like a line of falling dominoes, that savings will result from better business profit, improved cash-flow, and a more cautious approach to managing assets. As Laura Carstensen put it, the savings should be “. . . automatic and invisible” but doesn’t have to be impossible.
If you are a dentist that is ready to get serious about your retirement, put us to the test and take our Three Week Wealth Workup to find your own potential.
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