Money 101: What Doctors Need to Know Before Graduating from Dental School

Ihad the privilege of attending the graduation ceremony for the University of North Carolina School of Dentistry in May of 2009. My brother, Dr. Chris Miller was lining up with his classmates, who were all eager to graduate and begin their dental careers. Like many graduating doctors, Chris was ready to transition from the life of dental student living on loans to a working professional earning an income! As Chris and I spoke about his plans following graduation, one common theme emerged in our discussions – how should young doctors manage their money? Most dental curriculums

focus almost exclusively on the clinical side of dentistry, leaving a critical gap in what new doctors truly understand about managing their own money in today’s complicated and ever changing economy. Below are a few money management tips that will allow young doctors to start their dental careers on the path to financial success.

Brett S. Miller, CPA, CF

Always Have a Plan

We find ourselves in difficult economic times. Over the past ten years, it’s been proven that dentistry is not recession proof and most doctors’ wealth has suffered. According to Dental Economics, only 5 percent of dentists can actually afford to retire at age 65 and maintain their current standard of living. Additionally, John K. McGill, editor of the McGill Advisory and principal of the

McGill & Hill Group, says the reason that most doctors struggle financially is not that they plan to fail, they simply fail to plan. No doctor works through dental school and perhaps a specialty to end up flat broke at the end of their career. However, many baby boom generation dentists find themselves in this position because they failed to implement a plan that would allow them to retire at the age of 65. The biggest mistake doctors make is not working with a dental specific financial planner as soon as they start their professional career. Developing a comprehensive financial game plan, in writing, is one of the most important financial decisions that a young doctor can make. Just remember, it’s much easier to pursue and attain a goal if it is clearly defined.

Be Smart About Debt

Like many dental professionals, Chris financed his education with debt. Many

of today’s graduates use student loans to pay for dental school and others acquire even more debt to pay for their entire education. Additionally, many doctors have debts associated with a car, home, credit cards, etc. Regardless of the individual circumstances, “Should I pay down debt?” is one of the most common questions new doctors ask. The answer - it depends. Debt should be separated and classified into separate categories based on the interest rate and tax deductibility. Consumer related debts (credit cards, department store charge cards, cars, etc.) have the highest interest rates (typically above 7 percent), and the interest is not tax-deductible. We suggest paying these debts as quickly as possible to avoid the crippling interest costs. Loans secured by a doctor’s house (mortgage and home equity line of credit) are tax-deductible and the interest rates are typically between 3-7 percent. We understand that many dental students don’t yet own homes, but for doctors looking to purchase a home, we recommend they speak with a mortgage specialist to lock in a rate below 4 percent over a fixed time period (15 or 30 years). Education debt (student loans) typically has the lowest interest rates (below 4 percent) and should be the last debt young doctors should consider pre-paying.

As a result, they fail to budget and live well above their means for a majority of their dental careers trying to keep up with the Joneses. Establishing a budget and sticking to it can alleviate this problem by allowing you to control your spending and ensure proper retirement savings. Additionally, it prevents doctors from accumulating consumer debts that have

high interest rates and kill monthly cash flow. The good news is that young doctors can choose to avoid this problem by establishing a budget to track their expenses now. Mint.com is a free personal finance website that allows users to develop a budget and monitor their cash flow. If young doctors get a handle on their spending now, it will lay a solid foundation for their dental careers.

Being smart about debt is a very complicated practice and we recommend that new doctors speak with a dental specific financial planner before taking on additional debts. This will ensure that doctors are in the appropriate debt structures and financing terms, along with providing a great basis for discussion regarding prepayment of debt.

Save First, Save Often

The No. 1 goal for all doctors is to be able to afford to retire and it’s never too early for doctors to start thinking about their future. In the book “Rich Dad, Poor Dad,” Robert Kiyosaki introduces the concept of “pay yourself first.” Most doctors make the mistake of making money, spending money and then trying to save. This is a poor money management technique, and the savings goal is very rarely achieved because the majority of money is already spent. We commonly refer to this as the “gone factor.” Instead, doctors should build savings goals into their budget and the first payment every pay period should be to savings. Doing so ensures doctors will save more money and prevents a savings failure.

Establish a Budget and Live Within Your Means

Overspending is one of the key reasons that many doctors can’t afford to retire. The more a doctor spends, the more money they will need for retirement. Moreover, higher spending leaves less assets available to save. Recent studies indicate that most doctors don’t know how much they are actually spending.

Another important tip for new doctors is to begin saving as soon as possible. Compound interest and the time value of money are very important factors in determining retirement success. The longer savings are allowed to grow and earn interest, the bigger the nest egg will become at retirement. For example, assume that two doctors commit to saving $5,000 per year, at a growth rate of 8 percent per year, until retirement at age 70. The first doctor begins to save at 30 and the other waits until 40. At 70, the doctor who began saving at 30 will have accumulated $1,398,905 in savings while the second doctor will only have $611,729. That represents a difference of over $785,000! Why? Even though the difference in contribution was only $50,000, 10 years of procrastination resulted in the second doctor’s assets having less time to grow and compound!

The longer savings are allowed to grow

and earn interest, the bigger the nest egg will become at

retirement.

Prioritize Your Savings

Once a doctor has committed to saving for retirement, it’s important to save in the proper order. Generally, the recommend savings order in the following order: 1) Retirement Plans, 2) Individual Retirement Accounts, 3) Education, and 4) Personal Savings and/or Pre-Payment of Debt. A doctor’s first priority should be to contribute the maximum to their company sponsored retirement plan (401k, 403b, Simple IRA, SEP IRA, etc.). If that is not possible, at a minimum, doctors should contribute up to the amount that the plan matches. After fully funding the retirement plan, a doctor should consider funding a Roth IRA. Roth IRA contributions are subject to an income threshold, and if a doctor’s adjusted gross income is higher than the contribution phase out range (Single - $110,000 to $125,000; Married - $173,000 to $183,000), doctors should fund a non-deductible IRA. For doctors with children, the next funding priority is to save for future education expenses. After fully funding these three items, doctors should consult with their advisor about investing the remaining money personally or look to pre-pay debt starting with the highest interest rates.

Avoid High Cost Commission Based Investment and Insurance Products

The final money management recommendation for new doctors is to protect their savings and invest in a prudent manner. The investment and insurance professions are very complex and have been further complicated by the extreme market volatility over the past several years. Many financial experts still recommend the tried and true theory of dollar cost averaging and I fully support this concept. When starting to invest, doctors should use a discount brokerage firm such as Vanguard, Charles Schwab, Fidelity, TD Ameritrade, etc., to set-up a balanced allocation of noload mutual funds containing both equities and fixed income that is appropriate for your risk tolerance. From an insurance perspective, we recommend doctors stay away from permanent life insurance and/ or annuity products. Doctors should seek to add term life insurance in an amount equal to their future earnings potential. A new doctor will need more term insurance to cover their higher load of debt and lack of retirement savings. As a doctor matures, their insurance needs should decline as they pay down debt and build retirement assets.

Good Luck!

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ADS Transition Specialists (888) ADS-4237 www.ADStransitions.com

ADS is the nationwide leader in dental practice sales, associateships, buy-in/buy-outs, partnerships and appraisals. ADS is comprised of the industry’s most experienced professionals, including dentists, attorneys, and CPAs. We can help you with each step of your next transition. To view a complete list of practice opportunities available in your desired area, visit us at ADStransitions.com. Please see our ad on page 17.

ADS South is the premier dental transition organization in the Southeast. We provide associateship placement, dental practice sales, appraisals, and expert testimony services. Our company was founded over 26 years ago by Earl M. Douglas, DDS, MBA, BVAL, and we continue to control the cutting edge of transition technology. Please see our ad on page 12.

The final money

management recommendation for

new doctors is to protect their savings

and invest in a prudent manner.

Please reach out to our authors

As this article goes to press, a new generation of dentists will be entering their final semesters. I encourage each new doctor to make smart, informed decisions to better their financial future. There are many advisors who can help along the way, but ultimately it depends on each doctor’s level of commitment to his or her own financial success. Good luck! ■

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