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Financial Timelines for Any Age Doc Douglas Carlsen, DDS

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At what age should doctors do what and have what financially? How do you judge your progress? I’ve consulted with over 300 doctors over the last six years and follow academic authors. The following provides general rules of thumb for a doctor wishing to retire by his or her early to mid-sixties with a lifestyle similar to what that doctor had while in practice.

Doctors Late Twenties to Mid-Thirties

The young dentist will often buy into an insidious mental framework of debt being a natural part of life. It isn’t. If you tie your identity to debt, you’ll end up needing to work 10 to 15 more years than the dentist that doesn’t. This is the most important message in the series. Debt is never your friend. Many will tell you to use debt for leverage, tax advantage and other ploys. Nonsense!

1. Student Loans

Young doctors now have between $200,000 and $450,000 in loans after graduating from dental school. There are 25-year and income-based loans that young doctors often take out. How does this pan out? I know doctors in their late 40s who still have a $1,500 a month student loan payment along with a mortgage of $3,000 a month, auto leases totaling $1,500 per month, a practice loan of $6,000 per month, and private K-12 school payments of $3,000 per month for two kids. This totals $15,000 per month or $180,000 annually without paying for taxes, food, clothing, utilities, insurance, home maintenance and upgrades, or DirectTV! What can the young dentist with onerous student debt do? Unfortunately, suck it up and live like a student for a few years after becoming a doctor. One who pays off student debt quickly will have real savings by age 50. Here are some tips:
  • Always pay off credit cards completely every month. If you can’t, cut IT up and use a debit card.
  • Do not take out a car loan or lease. Learn to pay cash.
  • Do not buy a home before purchasing a practice. The stress of starting a practice is high enough without worrying about a mortgage. Wait at least two years.
  • Do not take out a mortgage for more than double your salary or net income. The banks will lend you much more, yet the large house is one of the two major blocks to dentist’s real wealth.


2. Savings

As soon as all debt except your practice loan and mortgage are extinguished, establish an emergency fund of six months of home expenses. This is normally $50,000. Put the money into money market funds. Retirement Savings: A good rule of thumb is 15 percent of your net income per year starting by your early 30s to retire in your early 60s and 20 percent to retire in your mid- to late 50s.

3. Investing

Read one book before funding retirement savings, The Little Book of Common Sense Investing by John Bogle. For young dentists, the best investment strategy today is to invest in target date funds with Vanguard. Warren Buffett, Burton Malkiel, Rick Ferri, John Bogle, Larry Swedroe, and many other authors state that the best investment results come from two things. Having the lowest fees and investing in the entire world market. Vanguard target date funds accomplish this better than any other strategy. Do not get involved with a financial adviser that does not use index funds. For complete financial planning, look at LearnVest at learnvest.com. They have complete financial planning solutions for a $499 setup fee and $19 per month. After starting a practice, look at the financial advisers listed in the next section.

Doctors Mid-Thirties to Mid-Fifties

A CPA told me years ago, “Never take out a loan for something that depreciates in value.”

1. Student Loans

These should be paid off completely by one’s mid-tolate 30s. If not, make it your top priority to extinguish. Many docs tend to collect loans, as Dave Ramsey says, like stupid pets! Once you pay off a major loan, you’ll have a real chance to save.

2. Practice Loan

Brian Hufford of Hufford Financial, provides guidance with his Financial Balance Guide. From a dentist’s net income, Hufford indicates that one should designate 25 percent to personal living expenses, 25 percent to all loans, personal and business, 20 percent to savings, 25 percent to taxes, and 5 percent to large personal or practice purchases.1

For a young dentist, age 35, with a $180,000 income, total annual loan payments should be no more than $45,000. Auto loans at $1,250 per month eats up $15,000. A student loan of $2,500 per month ends the process. No practice or home loan is possible. Kill that student loan early, docs!

For a young dentist with no student, auto, or home debt and an expected net income of $180,000, a 10-year $300,000 practice loan at a rate of seven percent would have $3,500 monthly payments with a total yearly loan burden of $42,000. That’s within Hufford’s guidelines. Yet, there isn’t enough left for a home loan yet.

3. Home Loan

After owning your practice for a couple years, consider a home loan, as long as it fits within Hufford’s parameters. Charles Farrell in “Your Money Ratios: 8 Simple Tools for Financial Security”, points out that the maximum amount of mortgage debt should never be more than twice your net family income.2

Farrell also relates that your primary residence value increases only at the rate of inflation over many years.2 Thus, you will not be able to fund your retirement via your home. Actually, the more mortgage you have, the less you’ll have to save for retirement.

4. Savings

As soon as all debt except your practice loan and mortgage are extinguished, it’s time to save for retirement. A good rule of thumb is 15 percent of your net income per year to retire in your early 60s.

5. Investing

As with the young docs, you need to read but one book before funding retirement savings: “The Little Book of Common Sense Investing” by John Bogle.

Can one invest effectively on one’s own? Yes. The easiest way is to use target date funds from Vanguard. Your portfolio is diversified, it’s automatically rebalanced periodically, and the fees are lowest. Charley Ellis, noted author says, “There is no better way to identify which funds will have the best future returns than low fees.”3

For full financial planning advice at a reasonable cost, there are many great choices available. Apologies are in order to any planners working with Townies that I’ve missed that use index funds and flat or hourly fees. Here’s a couple resources to consider:

Please, don’t work with anyone who promises to beat the market. Academically, almost all trail their benchmark indices by a wide margin.

Doctors Mid-Fifties to Seventy

1. Debt

All debt should be gone by the time you retire. If you carry a mortgage into retirement, be sure to include the yearly payment in your retirement income. A mortgage of $3,000 per month will increase your pre-tax income needed in retirement by $45,000 to $50,000 per year, necessitating an additional $ 1 million saved. Add the amount to the figures on the right.

2. Savings

Charles Farrell indicates to retire at age 65, a dentist needs to have the following amounts saved at the ages below.4
Age 55: Six times net income
Age 60: Eight times net income
Age 65: 10 times net income
According to Farrell, a doctor needs 14 times one’s net income if he wants to retire at age 60 instead of 65.

3. Investing and Draw Down

Calculate your retirement income need. Do not rely on the 80 percent rule or a gross estimate. You must construct a line-item budget to figure needed income. Next, have a Monte Carlo financial scenario done. Financial engines at FinancialEngines.com or your adviser can provide this service.

Make sure you have a proper retirement investment allocation and strategy. Talk to Vanguard first. Vanguard has done the most research on retirement investing and draw down strategies. Vanguard has several ways to draw down your retirement funds. Many docs now use a 2010 target date fund that is 40 percent stocks and 60 percent bonds. Others use the Target Retirement Income Fund that is 35 percent stocks and 65 percent bonds. Another good option is to have a portion of your funds placed into an immediate fixed annuity. This is the only type of annuity I recommend as the fees and expenses are quite low.

Next, have your adviser prepare an alternate retirement investment strategy. Compare to Vanguard’s plan.

Make sure your withdrawals are taken in tax-efficient order: taxable funds followed by tax-deferred funds IRAs and 401(K)s and other office retirement plans followed by tax-free funds (Roths). Your brokerage will set up automatic payments into an account you choose. Make sure your withdrawals are taken in tax-efficient order: taxable funds, followed by tax-deferred funds such as IRAs and 401(K)s and other retirement plan funds, followed by tax-free funds (Roths) is the normal draw down sequence.

Required minimum distributions at age 70.5 can be set up with your brokerage handling all the details.

4. Social Security Benefits

When should one begin taking benefits? As late as possible as long as you have a life expectancy beyond age 80. Each year you delay benefits, your benefit increases eight percent after inflation. No investment has ever delivered that type of return without enormous risk.

Consider strategies such as file and suspend. Once full retirement age is reached a beneficiary can file for benefits, but then immediately suspend receipt of those benefits until some future date. A spouse can claim a spousal benefit and the main beneficiary can let his or her own retirement benefit grow at eight percent per year. Other options can be found at Socialsecuritychoices.com.

5. Estate Planning

Make sure to have a comprehensive plan in place as early as possible, certainly by age 55. Find a tax attorney either through a personal recommendation or the American College of Trust and Estate Counsel.

Note: I have no financial connection to any of the mentioned individuals or companies in this article.

References
  1. Charles Farrell, J.D., LL.M., Your Money Ratios: 8 Simple Tools for Financial Security. New York, NY: Avery, 2010, page 79.
  2. Brian C. Hufford, CPA, CFP, “Maximize Your Wealth: Improving Upon the Reality of Your Finances,” AGD Impact, February 2010.
  3. Charles Farrell, J.D., LL.M., Your Money Ratios: 8 Simple Tools for Financial Security. New York, NY: Avery, 2010, page 79.
  4. Ibid, page 85.
  5. Charley Ellis, “Why Mutual Fund Fees Are Actually 15%,” video downloaded at http://www.youtube.com/watch?v=__e4Vz6WB7A&feature=share&list=PLG_7EnFiseFk1W-JC8-FfciuF5s889rDB on Nov. 13, 2013.
  6. Charles Farrell, J.D., LL.M., Your Money Ratios: 8 Simple Tools for Financial Security. New York, NY: Avery, 2010, page 42.
Dr. Douglas Carlsen has delivered academic-based financial education since retiring from private practice in 2004 at age 53. He has no connection with any company or individual and speaks his mind freely.

Carlsen is very interested in speaking to your study club! Contact at 760-535-1621 or drcarlsen@gmail.com.

Over 25 videos available: search Dr. Doug Carlsen YouTube. Additional Carlsen Dentaltown articles are at: www.dentaltown.com. Search "Carlsen." Carlsen website is at www.golichcarlsen.com.

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