December 1, 2001
by Barry McNulty
The Oxford Concise Dictionary defines pension as a periodic payment made especially by governments, companies, or employers in consideration of past services or a relinquishment of rights. A broader definition of the word pension in my view would include all the automatic programs (stock options, deferred profit sharing, retirement compensation arrangements, the actual pension itself) that build up the necessary pools of capital to fund these periodic payments. Today such pensions are an integral part of well-conceived compensation packages. Further, such programs afford employees the luxury of being able to be somewhat passive when it comes to their retirement planning.
There are many advantages to being an independent dental practitioner. There are also responsibilities. One of the most important is being proactive about building what is in effect your pension as was broadly defined above. There is no corporate pension and benefits department that is accountable. You’re on your own. Strategies to fund your deferred income requirements should form part of your ongoing practice planning. Like key employees, your compensation package, the net income your practice generates, must be strategically-managed to meet all of your needs. What follows is a checklist to help guide you in proactively building the desired pools of capital (your pension) for a successful transition and secure retirement.
Define what retirement will mean to you. Be specific. Everybody has different needs. What may be meaningful in terms of a retirement lifestyle for you may not be at all suitable for your colleague. Imagine you have completed a successful transition and are now enjoying the “good life”. What’s it look like? Where will you live? What will you do to give yourself purpose and create a sense of satisfaction? Will you develop new skills or interests? What about travel? A critical component of a successful transition and retirement strategy is a well- defined set of goals or objectives. It’s the only way you can determine what it will cost to finance the right retirement lifestyle. You’ll also need this information to determine the appropriate sum the pools that represent your pension must grow to.
Do you know how much money you need to save beyond RRSP contributions to reach your goals? Your practice and its eventual sale will likely form one of the major pools of capital making up your pension. Do you have a clear understanding about what it is worth today? Is there a plan in place to manage or improve this value? Owning a practice is an investment. You don’t need to have all the responsibilities of ownership to practice dentistry. Basically there are two things at work in your practice. They are you and your capital. If you are not earning an amount that exceeds what you would make as an associate, I would recommend you reconsider your practice strategies. My best advice is to get a professional valuation. Further, consider the valuator an advisor and get input on how to manage the value in your practice.
Does a partial transition appeal to you? When you do a full transition, would you like to associate for a period of time beyond what is normally required to facilitate the transfer of goodwill?
Are you taking advantage of tax strategies to build up additional pools of your pension capital? These include income splitting with family members and incorporation of all (in provinces where professional incorporation is currently permitted) or part of your practice via a hygiene or technical services company. Most dentists are taking advantage of RRSP contributions, but have you considered setting up a Retirement Compensation Arrangement. RCAs are a relatively new retirement planning tool that have been used in the corporate world and are becoming more common in dental strategies. Another option is universal life insurance. It is often touted as a great tax deferral saving alternative. It would be my strong recommendation that you consider such proposals very carefully. Get a second opinion, check the assumptions, and compare the projected benefits closely to other alternatives.
Do your investment strategies compliment your transition and retirement objectives? The closer you get to your transition date, the more important it becomes that the portfolio be organized to meet your retirement living needs. Is capital preservation one of the goals of your investment strategy? When you are living off your capital it may not be prudent to subject it to risks that may have been acceptable when you were working and could afford to replace losses. As well, part of your investment strategy should include organizing the portfolio structure so that it provides that retirement income in the most tax efficient manner.
Life is what happens while you are making other plans. What changes will your transition and retirement necessitate on your risk management? Risk management would include your estate planning and insurance needs.
Will your debts be retired by the time you are? Debt increases risk. Considering a transition that will leave you with outstanding debt could threaten your ability to enjoy a secure retirement.
Finally, are you monitoring your progress on a regular basis? This is critical. Factors that impact your transition and retirement outlook will constantly change. Examples are inflation; higher or lower than anticipated investment returns; tax regulations; success of your savings plan and so on. I would recommend that you update your transition strategies at least annually to make sure they remain relevant.
At the beginning of the last century, the average life expectancy of a male was approximately 49 years. For a female it was 47 years. Today the averages are up to age 79 for a male and 82 for a female. It is important to clarify that these lifespan estimates are averages that factor in statistics from birth to death. Apparently, if you reach age 65 today in relative health, statistically there is a strong probability that you will live beyond the averages. Given these facts, unless you have information to the contrary, it is prudent to plan for a long life. Outliving your capital is not a pleasant image. This means that the pools of capital that will make up your pension will need to be significant, relative to your goals and defined needs. Don’t leave this to chance. Successful transitions and secure retirements happen by design and not default.
Barry R. McNulty, CFP, RFP, CIM, FCSI, is a financial advisor with Assante Capital Management Ltd. The opinions expressed by the author are not necessarily those of Assante.