Second Opinion: Do You Have a “Lottery” Retirement Plan? By Mark T. Murphy, DDS

According to several published resources, more than 90 percent of us have a less than predictable plan for maintaining our lifestyle and income fully at age 65. In a profession that generates our levels of personal income, this is unforgivable. Unless of course we have consciously chosen to live up to our income instead of on less (and understand the consequences of failing to accumulate, preserve and perpetuate wealth). Most of us spend far too much in the narcissistic pursuit of short-term happiness. We often try to bloat our self-esteem by showcasing cash flow in the form of dental professional “bling bling” while forgoing the development of our net worth.

Even though I did not play the lottery, I was just as lucky. I had a close friend who was a CPA who made (strongly asked) me borrow $4,000 when I first married at 21 years of age (because I did not have it) and fund IRAs for Denice and me. Those funds we borrowed and invested our first three years will yield more than $700,000 at age 65 (assuming 10 percent ROI). That is 64 times what we put in and represents six doubling periods (70 divided by rate of return = the doubling period in years). For several years after that, we had the $4,000 and funded IRAs without borrowing. Then we began living on 90 percent of whatever we made in a year and put away more aggressive sums for retirement. Smart? No way! Just lucky (meaning I listened to good counsel). If I did not have my buddy telling me what do (or if I had not listened), I might have bought a nicer car, bigger house, taken fancier trips or worn more Hugo Boss suits and Rolex watches… all of which I do now at age 50 because my retirement house is in order. In “The Millionaire Next Door” Stanley and Danko talk extensively about this difference between prodigious accumulators of wealth and conspicuous consumers of income. The fact that the most common vehicles driven by net wealth millionaires is not a BMW, Lexus or Benz, but a Ford F150 pick up or Suburban, speaks volumes regarding the buying/saving decisions we can make.

At the Pankey Institute where I teach, we spend time helping participants understand the financial foundations that are necessary for making sound decisions that accumulate, preserve and perpetuate wealth. Michael Gerber was right in his E-Myth series of books. We have been trained as dentists, not in how to run a business; we have technical expertise to fix things but might lack the knowledge that leads to sound business decisions that positively impacts our futures. We should become adept at the following skill sets:

Living on less than we make so that we are financially free to invest the difference. In our profession, there is adequate income to invest at least 10 percent of what we make so that we have funds to put to work for us and accumulate wealth. In the book, “Rich Dad Poor Dad” Richard Kiyosaki describes this as the real key to financial independence; accumulating wealth and putting dormant assets to work. If we can temper our instant gratification urges and make more of our resources work for us, it will pay huge dividends down the road. Similar to building our restorative cases on a solid periodontal and occlusal foundation, we should build solid financial foundations for our selves, staffs and families.



The time value of money is what allows us to accumulate wealth easily. Starting early is the key. Time itself is the biggest asset of all. If one 22-year-old twin sets aside the maximum IRA contribution ($4,000 this year) for six straight years, and then nothing else ever again. And the other, starts at age 28, (when the first one stops investing) and begins to save the same amount every year. The second twin will not catch the first twin until age 65! The early saver only had to put away $24,000 total and did it early, while the late starting twin had to save and invest a total of $152,000 over 38 years to get the same result ($1.4 million). Your next assumption is correct – if you did both, you would accumulate more than $2.8 million by investing just $4,000 annually and starting early (all calculations assume 10 percent return). When my kids began working in my office at an early age, they funded Roth IRAs regularly. If you think this math gets exciting for us at an early age, track an annual contribution of $4,000 from age 10 for one of your kids. If they retired at 65 years of age and had averaged 10 percent annually, they would have more than $7 million!

The cost of capital is another important factor. Some debt and interest rates are not as bad as others because they are deductible. Credit cards should be paid down of course, but I would rather not see someone pay off his house unless he has already taken care of his retirement investments. Being “out of debt” is great if we have funded our tax-deferred and tax-free retirement vehicles fully. Otherwise, we might be trading the “peace of mind” that being “debt free” brings for a lottery ticket in the end. I knew a dentist my age (50) who bragged about being debt free, but only had $80,000 saved for retirement. To achieve his goal, he would need to save another $78,000 per year (at a 10 percent return) until age 65 to get the same $2.8 million our twins were chasing in the above example. If he chose more conservative investments to safeguard his capital because of stock market volatility and averaged 7.5 percent, he would need to save another $10,000 annually to make up for the change in interest rate. Time is expensive so start early (NOW). Understanding the cost of capital and the deductibility of interest rates frees us to make better decisions on where to put our money.

What to do if you are younger?

If you are young, simply get started with good counsel. Live on less and save 10 percent or more of what you make. You can use IRAs, 401Ks, and other qualified plans. Pay down bad debt and load your tax-deferred and tax-free retirement accounts early and often. The more you can get in early, the bigger it grows. A $65,000 car at age 30 feels better than a $35,000 car now, but the extra $30,000 you spent would be worth nearly $1 million at age 65. Understanding the true financial impact of our decisions puts us in power to choose well and create a preferred future.

One very exciting way to front load a retirement investment is by leveraging your accounts receivable into a compound growth curve without factoring. Putting your otherwise dormant assets to work is one of the best things we can do. This innovative financing can allow younger dentists to put hundreds of thousands of dollars into an investment that can grow and be used tax-free when you retire. This loan, which you will only pay the interest on, is secured against your A/R. It is a deductible business expense and the structure of the deal allows the invested principle to grow inside a universal life insurance policy tax-free. You can then borrow against it at retirement and use the proceeds without paying taxes on them. The 37-year-old dentist who bought my practice in 1998 has this kind of a plan and simply pays the interest on a $400,000 loan during his working years (about $2,000 per month) and will have nearly $3 million when he retires in addition to his other investments… YOWSER! And he gets to use it TAX FREE!!! He will borrow against the cash value, with no intention of paying the loan back. It will reduce the death benefit of the insurance portion of the investment vehicle at a time when he will need less anyhow.

What to do if you are older?

For older dentists like me, we have lost the time value part of the equation. We have fewer doubling periods left. For some, it will still make sense to enter into the kind of investment described above, but we do have other options. If we are going to put larger sums away to play “catch up” with the young investors, we can build wealth and avoid taxes in some of the whole life programs that are still in play. By setting aside $30,000 at age 52 for the next 12 years, one can accumulate a $1.4 million death benefit that can be borrowed from, tax-free, at age 64. It’s an incredible way to accumulate, preserve and perpetuate wealth in a single investment. It provides a source of retirement income while maintaining a significant corpus to add to our legacy. I have actually moved about 30 percent of my nest egg into a variable annuity that will provide steady income in retirement. It grows right now invested in mutual funds but also has a guaranteed rate of return of five percent. As I get closer to retirement age, I become more risk aversive and look for “safer” investments that might carry lower rates of return. No Enron ending for me!

Making these financial decisions should include your trusted advisors, accountant and investment counsel. Finding someone with the savvy, knowledge and philosophical congruence to you is critical. If you would like more information about these or other innovative investment opportunities, e-mail me at mmurphy@pankey.org. I welcome your comments and experiences and am happy to hook you up with more information about the investment vehicles described in this article. They are real and tax tested… they only seem too good to be true.

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