What every financial advisory client really wants to know

“Are you rich?” What sort of response does that question evoke from you? It would be an interesting dental study club topic, wouldn’t it? I am currently reading Someday Rich: Planning for Sustainable Tomorrows Today by Timothy Noonan and Matt Smith. It is the authors’ contention that this question is what every financial advisory client really wants to know.

We all measure wealth in different ways, some tangible and others intangible. Common yardsticks include income; consumption; real estate; health; family; and what we have in comparison to our high school classmates, dental school classmates, or the public at large. To paraphrase the authors, being rich means only one thing: I now have enough money saved to support my living expenses without working for the rest of my life, in addition to something left over to give away. They assert that maintaining a certain lifestyle is a central anxiety for people. They cite a 2010 survey by Allianz Life Insurance Co. of North America, which found that 61% of its respondents were more afraid of outliving their assets than they were of dying.

The authors’ definition of what it means to become rich is very compelling in that it’s intensely personal and meaningless in relation to anyone else or any high-level statistics regarding society in general. What does it matter if my income is in the top 1%? I’m not actually rich until I can support my lifestyle from nonworking resources for the rest of my life. Likewise, the ability to consume like a movie star may only raise the lifestyle bar and postpone the reality of becoming truly rich.

There are two central barriers to becoming rich in dentistry, at least as the authors define the term. The first barrier involves common terminology. The terms “rich,” “wealth,” and “retirement” tend to bring up as many negative emotions as positive ones. Dental health and excellent clinical dentistry are important public services. How do the terms “rich” and “wealth” complement serving patients?

Similarly, retirement feels like the death of vocation, which can be described as the place where the heart’s deep passion meets the world’s deep need. The reality, though, is that prosperity and excellence in clinical dentistry are soulmates. A further reality is that a plan to become “rich” can galvanize your important contribution to the world if it’s viewed through the lens of stewardship and the living of an intentional life.

The second barrier to becoming rich, at least as the authors define it, is acquiring the necessary skills to remove the obstacles preventing you from becoming so. How does one truly create a goal and a plan to become rich? The most important contribution of this book to financial planning is how the authors remove the complexity of the goal itself. Let’s pretend that you, your spouse, and I form a committee that must chart a path to make you rich. How would we determine how much money you will spend in the future, what inflation and investment returns you will achieve, how long you will live, and how much savings you must have?

The authors solve this problem by presenting a way to pursue this goal scientifically. They use the methodology employed by insurance companies and actuaries to plan funding and investment levels for public retirement plans, annuities, or defined benefit plans. The goal they put forward is a concept called “funded status.” Funded status is simply a measure of current retirement assets compared to future spending liabilities. The scientific component they introduce is how best to deal with investment risk, inflation risk, and longevity risk, which is no small task. Funded status is then given as a percentage. For instance, a dentist with a certain set of goals is 45 years old. Pursuant to those goals, her current funded status is 23%. Her desire is to have a funded status of 100% at age 62. The formula indicates the savings needed next year to achieve her objective is $53,450. This is updated annually.

What is more important on your journey to become rich (that is, to achieve a funded status of 100%)? Is it the purchase of a second home, or whether your practice is growing at 10% per year? Is it paying the lowest amount of tax possible, or whether you beat your portfolio benchmark? Perhaps the best approach involves knowing that your current funded status is 65% and having a plan to achieve a funded status of 100% at your desired age, which then colors all of your financial decisions.

Reprinted with permission from Dental Economics

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The opinions expressed by featured authors are their own and may not accurately reflect those of the BAM ALLIANCE. This article is for general information only and is not intended to serve as specific financial, accounting or tax advice.

© 2015, The BAM ALLIANCE

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