November 1, 2016
by Mark McNulty
There are many key milestones in a dentist’s practice and personal life. One such milestone for the average dentist I know occurs when you turn 58. It is the day you actually start living your retirement plan. That’s because the average dentist I know is out of dentistry by age 62. Therefore, until age 58 the retirement plan is just numbers. At age 58 however, with only four more years to prepare, the realization seems to hit that this retirement thing is actually going to happen – and you better get ready.
Remember, you only get one chance to sell your practice and retire. The decisions you make from age 58 to 62 (for my average dentist) will affect you for the rest of your life. So we need to get them right.
To give you an idea of what has to happen over those four years, we collected information about ten of our clients – dentists age 56 to 59 – and created a case study. Our objective is to give you real-life data on your colleagues’ practice and personal finances, as well as on how they approach their practice and personal planning at this milestone – age 58.
Note: These figures do not represent the “average” 58-year-old dentist. The sample size is too small. In my experience, the ten people we have selected would rank in the top five percent of all Canadian dentists in terms of financial success.
Below is information on the finances of our average 58-year-old dentist – let’s call the couple Andrew and Judy.
As you can see, this dentist (who is the average of the ten dentists we used to create the case study) has reached a very high level of financial success. As mentioned earlier, the ten dentists are likely more financially successful than 95% of their colleagues. But even at this level of financial success, they need to follow the same path to selling their practice and retiring as all practice owners do.
The Path to Retirement for a Practice Owner
Step One: Quantify where you are today in a financial sense. What resources do you have available to fund your retirement? For the case study, this is summarized in Figure One.
Step Two: Quantify where you want to go. Up until this point (age 58), most of your retirement goals were likely somewhat abstract: “I plan on retiring in my 60s”. They also likely changed a few times – one kid decides to go do a post-graduate degree which you are paying for, so you decide to retire at 62 instead of 60. Now, four years away from selling your practice, you need to get specific. We need to start putting the pieces in place to finance your monthly cash flow that’s starting in four years. While it may change, you need to decide on the date you are retiring. Are you retiring in January the year you turn 62 or November? There is a big difference.
Also, how much money are you going to spend? Are you going to spend more in the initial years because of travelling, and less in your 80s? This is the time you need to get specific about your retirement goals.
Andrew and Judy have decided to retire at the beginning of the year they turn 62. For this reason, we now have only three years to prepare since they are already 58. Below is a projection of what they need in order to retire. As mentioned earlier, because Andrew and Judy are in such good financial shape they are in the rare position of being able to finance their retirement lifestyle without eating into their capital. In other words, they can spend $210,000 after-tax, indexed for inflation annually until age 90, at which point they would still have a retirement nest egg of $5.9 million.
Step Three: Design strategies to get you from where you are today to where you want to go. These strategies should focus on the sale of the practice, income tax planning, cash flow management, portfolio management, etc.
While 95% of dentists will not have the money Andrew and Judy do, many of the strategies that need to be put in place will be the same. For example, in the retirement projection we assume both Andrew and Judy will qualify for the capital gains exemption when they sell the practice. Each person is eligible for an exemption from tax on the sale of the first $813,000 of small business shares. We need to meet certain criteria for them to be eligible. For example, the shares will not qualify for the exemption with the current savings of $1,153,288 inside the corporation. The corporation needs to be “purified” two years prior to the sale.
Another example of strategy is to build a retirement portfolio that can finance their lifestyle. Investing changes when you are living off your portfolio. Do not wait until you are retired to adopt the right strategy. What if the stock market crashes after you sell the practice? You need to put safeguards in place.
Another strategy might be to obtain a practice valuation. Rules of thumb are no longer accurate. Estimating the practice is worth 100% of gross was fine a few years ago, but now we need to get specific. If your practice estimate is wrong, you do not want to wait until the year you plan to retire to find out.
We also encourage dentists at this stage to start what we call a “trial retirement”. The average dentist I know spends just over $10,000 per month in retirement. While this may seem like a lot of money, it is still a fixed budget which most dentists have not had for decades. We recommend starting to live on that amount a few years prior to actually retiring. It will help identify potential issues while you are still in control of your earnings.
Step Four: Monitor and Repeat
When the strategies are set, we recommend a four-year timeline be developed to manage all the different aspects of your big picture practice and personal retirement plan. This will allow you to set targets that can be monitored quarterly. Increasing the monitoring of the plan to four times per year allows you to deal with any missed assumptions proactively rather than waiting until it is
We also recommend starting each year at step one again and redoing the entire plan. This allows you to take all new information into account as it affects your plan. It keeps your plan relevant.
At age 58, there is a lot that needs to happen in order for you to be confident enough to sell your practice and retire by age 62. One of the reasons the ten dentists we used to create Andrew and Judy are in such good financial shape is because they started much earlier than this. Their plans are more real now because they are so close, but they have been managing towards this point for more than a decade. If you do have a desire to achieve their level of financial success, it is clear to me you need to do the same. Start early and make planning a priority.
About the Author
Mark McNulty is President of McNulty Group. McNulty Group helps professional families transition from a life of successful practice to a stress-free retirement by using a holistic approach of practice and personal retirement planning. Mark is the author of The $6 Million Dentist, The Transition Coach 2.0–A Canadian Dentist’s Guide to a Perfect Retirement. Mark can be reached at email@example.com.