September 2, 2022
by David Chong Yen, CPA, CA, CFP; Louise Wong, CPA, CA, TEP; Basil Nicastri, CPA, CA; Eugene Chu, CPA, CA
Dentists are facing what many perceive to be unprecedented times. Raging inflation, 8.1%, as of June 2022, vs. 1.1% in February 2021 and 11.91% in May 1982, staffing shortages, corporate dentistry, rising interest rates, prime rate 4.7% as of August 5, 2022, vs. 2.45% in February 2022 and 21.25% in September 1981. Government funded dentistry is part of the landscape making dentists anxious and even some questioning their chosen profession. Indeed, the more things change, from a historical perspective, the more they appear to be the same. We will review eight traits/strategies of financially successful dentists to illustrate that dentistry is still a lucrative and rewarding profession.
Financial success is ultimately determined by the practitioner’s mind set, discipline and patient care they and their team dispense.
Having served dentists for 39 years, these are eight traits/strategies which we have observed of financially successful dentists (top 4 percent of our client base, median age 56 years old) with a net worth of more than $12M, excluding their home (all have nil home mortgage):
1. They appreciate that their profession is turmoil (recession, COVID, Sars, 9/11) resistant, labor intensive and finite. Because of these characteristics, they spend and invest based on these principles:
i. Invest in passive investments, which generate passive income, including rent, dividends, interest and capital gains, when they are not at the practice. Ninety-five percent of these dentists own their building where they practice and 90 percent own rental properties. Many hire property managers to minimize headaches with tenants.
ii. Avoid permanent capital losses and forego exponential returns, e.g.: Bre-X, Nortel, now worth nil, and view fluctuations in asset values as an opportunity to buy quality investments. Their perspective is if they overpay for their dental building today and will be using this building for 20+ years, a temporary drop in value will not affect their decision to continue owning their dental building. They believe the value of their dental building 20 years from now will be more than it is today and that it will never be zero/worthless. They are risk averse. One dentist, with a net worth of $30M+, excluding their home, stated, “Given the 90 percent chance of converting $30M into $3 billion and a 10 percent chance of losing the $30M or a 99.9% chance of a 4% return, I will take the latter.” None of these dentists have invested in crypto currency or bit coins.
iii. Rental income is passive income, and they assume a vacancy rate of 10 percent, even if the rental property is fully occupied.
iv. They use a rule of thumb which, although inacc-urate and conservative, helps them plan for their future: Every $3M of net worth (assets minus liabilities) should generate $10,000 of income for life ($3M @4% = $120K/12 = $10K/month).
v. They are not focused or pre-occupied with corporate dentistry (large corporate players who buy dental practices). Instead, they invest in their staff and continuing education courses – thereby generating more cash flow in a given time – and in equipment, software, applications, which facilitate more cash flow with a given staff compliment and within a specified area. Their outlook is to maximize efficiency, cash flow and, therefore, their practice’s value. As one dentist stated, “I will focus my energies on maximizing the value of my practice; when I choose to sell my practice, I will get the maximum value and be in a position to determine who continues my legacy.” They believe they can co-exist with corporate dentistry. Given their large capital base, reserves and net worth, they are confident that they can compete and thrive in a competitive environment. One dentist asserted that it is no more competitive than during dental school.
2. Diversification: They won’t invest in various asset classes/sectors they don’t understand in order to achieve diversification and instead invest in what they know, including their dental business and other businesses which have a long track record of generating cash, such as big five Canadian bank stocks. They achieve diversification by investing in exchange traded funds and vehicles, which mimics broader indexes such as TSX, S&P, Dow. Their perspective is the tide raises or lowers all boats. Buying an index is simpler and psychologically they are inclined to keep this investment even when it tanks, versus trying to time the market. It is consistent with their desire to invest for the long term and simplify their life.
3. Passive income comprises more than one-fifth of their taxable income. Their passive income can support 75 percent of their current lifestyle. They acknowledge that dentistry is physically demanding. They invest in their health and body. They strive to achieve a work life balance and exemplify the credo, “Is the juice worth the squeeze?” They will forego marginal income if they perceive the related stress and/or risk is unreasonable or not worth it. They do not maximize profits and cash flow at all costs.
4. No one is an island. Dentistry requires a team to deliver results. They treat team members/employees with respect and perceive them as goodwill. They would prefer to lose a patient than a staff member.
5. They view dentistry as having a finite cash generating term and plan for when they physically and/or mentally do not wish to continue practising dentistry. They choose delayed over instant gratification. Like a squirrel, which protects the nuts it has discovered, these dentists spend less money than they take home, and invest the difference in:
i. Their dental business
ii. Passive investments
iii. Emergency fund – they have more than 6 months of emergency funds
6. They recognize taxes are their largest expense and hire tax specialists, not just tax experts, to minimize this expense. But they won’t invest in any investment solely because of the tax benefits. If the investment does not meet or pass their investment criteria, they will not make the investment even if the proposed, possible tax savings/benefits, are significant. They also benefit from COVID tax savings – get 100% tax deduction on most capital assets (equipment, computers, leaseholds/renovations, etc.) bought before 2024. One hundred percent tax deduction also applies to cars if owned by the practice, subject to proration for business usage. Keep in mind that tax rules limit the write off amount for all cars: up to $59,000 plus tax for fully electric cars and up to $34,000 plus tax for all other cars (including hybrids) based on limits for 2022.
7. They run their own race, never trying to impress others except their family. They appreciate the difference between pursuing the trappings of success and success. Most of these dentists have colleagues and friends who are not aware their net worth, excluding their home, is > $12M ( i.e., they fly under the radar).
8. Risk vs. Reward: They prefer to have peace of mind than the opportunity and related risk of being a billionaire. They revel in pursuing base hits and are not upset when they don’t hit a home run. Their passive income is steady, not exponential. They use time to multiply their returns. They appreciate that a lack of steady returns could steal their time.
Financial success is not the only element of success. It is difficult to be successful if your homelife is in shambles. The traits/strategies employed/exhibited by these financially successful dentists may not work for everyone. Observing strategies employed by financially successful dentists and making an informed decision about which ones may work for you could enhance your financial health, while providing a peace of mind.
About the Author
This article was prepared by David Chong Yen*, CPA, CA, CFP, Louise Wong*, CPA, CA, TEP, Basil Nicastri*, CPA, CA and Eugene Chu, CPA, CA of DCY Professional Corporation Chartered Professional Accountants who are tax specialists* and have been advising dentists for decades. Additional information can be obtained by phone (416) 510-8888, fax (416) 510-2699, or e-mail email@example.com / firstname.lastname@example.org / email@example.com / firstname.lastname@example.org. Visit our website at www.dcy.ca. This article is intended to present ideas and is not intended to replace professional advice.