Supporting Great Retirement Outcomes for Dental Staff
Everybody knows that planning for retirement these days is full of uncertainty. Our grandparents had it relatively easy. They could count on the combination of the Social Security and Medicare systems in addition to the many employers who maintained fixed pension plans that, like clockwork, wrote monthly retirement checks to their former employees. Those simpler times, however, are gone. Like it or not, today a successful retirement outcome requires a great amount of attention and planning.
As small business owners, dentists have access to a cadre of professional advisors to support their financial goals. Dental staff often does not. We think an important part of a dentist’s leadership responsibility is to mentor staff in planning for a secure and fruitful retirement. The objective of this article is to provide some helpful insights to assist dentists with this vital task.
First, the bad news
Let’s start with a little context about how well Americans in general are preparing for successful retirements. The Center for Retirement Research (CRR) at Boston College publishes reams of statistics on retirement planning each year. One of the reports it publishes annually is the National Retirement Risk Index (NRRI). This index attempts to assess how many Americans will be able to support their present standard of living in retirement. The most recent report, issued in December 2014, estimates that 52% of Americans will not be able to support the standard of living they enjoy today during retirement, even with Social Security benefits at their current level and access to home equity through reverse mortgages.1 As recently as 1989, only 30% of the nation’s future retirees were at risk.1 The need for better planning is clearly quite urgent.
Another research paper by the CRR calculated how much money Americans needed to save during their working years to have retirement income equal to 70% of their employment income.2 Several assumptions have to be made about investment returns, inflation, Social Security, and other factors. But to simplify the outcome, the CRR used selected inputs and produced the following savings table:
The overall amount of savings required for retirement and the portion of income that must be put away each year to achieve that figure is obviously daunting, especially given that many don’t address this goal until their early to mid-40s. It’s easy to understand why so many people today are forced to work until their late 60s or even early 70s.
Do you need it or do you want it?
A major focus of my career has been helping dentists find more money to save. Early on, I assumed that incomes in dentistry would make it easy to save 20% annually. I was wrong. I have found that, regardless of income, most dentists and their staff need substantial support to save meaningful amounts each year. To solve that problem, I turned to budgets as a way to help dentists and their employees lower their spending. Unfortunately, budgeting to create savings is about as successful as dieting is to permanently lower weight.
In my experience, the only resource that has worked well for increasing savings rates is a system that identifies Needs, Wants, and Savings. This magic spending formula consists of Needs (50%), Wants (30%) and Savings (20%). This method has proven effective in helping dentists manage their practices, and I believe it can be equally valuable for dental staff managing their personal finances and saving for retirement.
If the goal (according to the formula) is to save 20% of income every year, then spending on Needs should represent 50% of income and spending on Wants should represent 30%. Besides the most basic necessities, Needs are only two items: loan payments and taxes. This includes all loan payments (e.g., houses, cars, credit cards) as well as all taxes (e.g., federal income, state income, Social Security). Together, loan payments and taxes should not exceed 50% of income. Wants are also only two items: lifestyle spending and large purchases. A large purchase is any expenditure over $500 that is nonrecurring or discretionary. A good example is a child’s private school tuition. This classification avoids the impossible task of determining whether something like private school, for instance, is a Need or a Want. If anyone is unable to save 20% of their income under this system, it’s usually because either their Needs or Wants are out of alignment and must be integrated with their personal financial goals and priorities.
Do you own bronze, silver, gold, or platinum?
I like to think of the retirement plans offered by dental offices as types of precious metals. A Bronze Plan is a SIMPLE IRA. For 2015, it allows employees to make deductible annual contributions of up to $12,500 with an additional catch-up at age 50 of $3,000. In addition to employee contributions, the IRS has rules for employer matches paid for by the dental practice.
A Silver Plan is a basic 401(k) plan that allows employees to contribute up to $18,000 in 2015 with an additional catch-up at age 50 of $6,000. Like the SIMPLE IRA, the IRS has employer-matching rules for 401(k) plans.
A Gold Plan is also a 401(k) plan, with the same deductible employee savings limits, but utilizes additional employer-paid profit sharing contributions. If your dental practice has a Gold Plan, you’re probably golden. The dentist employer is likely covering the greater part of your needed retirement savings.
Finally, there is the immensely valuable Platinum Plan. A Platinum Plan consists of two retirement plans: a 401(k) plan and a cash balance plan (i.e., a type of defined benefit plan sponsored by an employer, which promises a predetermined benefit at retirement age for employees). This arrangement creates significant retirement savings for staff and dentists in a deductible environment.
Which plan a dentist chooses to adopt can greatly impact a staff’s saving strategies and retirement planning. Of course, none of these plans are worth much if employees aren’t contributing to them. Dentists and their employees need to understand that the amount of money participants put into their plans can have an even greater impact on successful retirement savings than the investments in them.
Can you trust your dentist- employer with your retirement goal?
Any dental practice that implements a deductible retirement arrangement must comply with rules and regulations from both the IRS and the US Department of Labor. In a qualified plan arrangement, the dentist typically is a fiduciary to the plan, meaning that, by law, he or she must make the employees’ interests paramount and operate the plan in accordance with the law. There are significant penalties, both civil and criminal, for failure to meet these requirements. There are also annual reporting requirements designed to keep staff informed of plan rules and annual results.
Dental practice employees are very fortunate to be working in dentistry, one of the best small-business environments in the country. Many small businesses cannot afford to administer or fund expensive retirement arrangements for staff, but those offered by dentists are typically among the best. Now it’s up to staff members to do their part and add their savings to the mix as well.
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.
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