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Year End 2011 Financial Highlights Douglas Carlsen, DDS

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How High is Inflation, Really?
I've read and heard countless pundits over the last two years pointing out the government's cover-up of high current inflation with denial of future inflation as a menace we all face. How nefarious is this menace?

As of August 31, official CPI-U figures show groceries up six percent and gasoline up a whopping 32 percent over the past 12 months. Not much cover-up there.

For an educated view, Charles Farrell provided clarity in a recent MarketWatch article.¹ His findings concluded the August 2011 CPI-U showed an inflation rate of 3.8 percent, historically low to moderate. Also, natural gas is two percent cheaper this year, dining out is up 2.7 percent, and housing is up only 1.6 percent.

Farrell says to get a proper read on inflation we need to look to the bond market. As of September 15, 2011, two-year treasuries were at 0.21 percent and 10-year bonds are at 2.1 percent, extremely low historically. He further indicated that bond traders are super-sensitive to any erosion of the income they will see from their bonds. For instance, if you have a bond that pays five percent a year and inflation is five percent, you end up with a zero rate of return.

Thus, the market expects inflation to be no more than 2.1 percent per year over the next 10 years.

Farrell says, "Regardless of what the government says the CPI is, bond investors make their own decisions about how much interest they must be paid to compensate them for current inflation and for future inflation risk. And all of these investors, from all over the world, who can do their own independent research of how much inflation is out there, are saying that there isn't much current inflation or risk of it in the near future."

So the bottom line for dentists is, don't listen to CNBC pundits squawk about high current or future inflation. Look to bond rates for accurate inflation information.

Where You Shouldn't Invest
Greg Daugherty, retirement writer for Consumer Reports Money Adviser, wrote of four "iffy" investments in the August 2011 issue.²

Daugherty claims, "Unfortunately, given today's sickly interest rates and volatile stock prices, many otherwise sensible people seem to be entertaining sales pitches they would have quickly hung up on in the past. And they're all the more vulnerable when the seller offers soothing assurances of safety."

Promissory Notes: These are issued by companies and are often (but not always) legitimate in the financial industry. They are often sold by insurance agents who might not know of the fraud, but certainly of the high commission.

The fraudulent products promise high interest rates with little or no risk. Scammers either make off with all your money quickly, or if running a Ponzi scheme, might pay interest for a while. In any case, you lose all principle.

Gold: To hold some gold (five percent maximum) to diversify your portfolio is fine. But be careful how you buy!

Investing in a gold mutual fund is prudent. Mining companies are also normally safe. Con artists often convince people to buy gold coins or bullion. Many investors want the safety of the real thing that one can actually possess in these troubling times! But where do you store it safely? That's where you get conned. The gold crooks will offer to store your gold for a small sum, usually somewhere you can't get to, such as Europe. It might be quite some time before you find that there was never any gold purchased in the first place.

Structured Notes: These promise what private equity and hedge funds promoted in the aughts. Structured notes are bond/derivative hybrids that guarantee you will receive some or all of your investment back, even if the underlying assets fall in value. These have very high commissions, are extremely complex and often have unspecified high risk.

Equity Indexed Annuities: My favorite scam! Supposedly, you receive a fixed, guaranteed rate of return with an additional return pegged to a given market index, such as the S&P 500. That guaranteed rate of return is often touted as four to five percent these days! Where can one get that rate with guaranteed safety? Not with these babies!

All sorts of reductions to your real return exist:
  1. Participation rate: It lowers your gain to a certain percentage of the index's gain, often 70 percent.
  2. Index rate cap: You might have a limit of say seven percent on any gain on your funds. If the S&P 500 gained 25 percent in a year, you would only be eligible for seven percent.
  3. Margin or spread: The index gain is determined by subtracting a margin or spread. This is often three percent.
Thus an S&P 500 return of 25 percent might be capped at seven percent, reduced to 4.9 percent by the participation rate, then decreased down to 1.9 percent by the margin or spread. As you can see, in good years for the stock market you would receive an intermediate U.S. Treasury rate, without the safety and liquidity of Treasuries.

The bottom line for dentists is, if it seems too good to be true, it most likely is. Be careful with any insurance product. Commissions and fees often outstrip any profit. Stop trying to beat the market! A 50/50 ratio of well-diversified stock and bond index funds gained four to five percent per year in the "lost decade!"

Never invest in any product unless you are sure it's registered with your state and that you know the seller is appropriately licensed.

End of Year Financial To-Dos

Practice Finance
Update fees: January is the time for your fee schedule update. To wait three months might decrease the average practitioner's net annual income by $6,000.

Go to Sikka3 for fees in your zip code; alternatively visit the free 2009 ADA regional fee update.4

Plan purchases: How much can you spend next year? Brian Hufford says to keep all personal and business purchases to five percent of your total production. Realistically, most practices keep purchases in the $20,000 range unless the equipment can demonstrate an immediate positive return on investment.

Plan staff evaluations: Does someone not embrace your vision?

Personal Finance
Target problem areas: In our family the problem areas are clothes and vacations. Others claim hobbies, dining out and joining "clubs," such as wine or travel clubs, are problems.

Discuss with your spouse how to corral budget problem areas the coming year. Don't dwell on last year. Set target maximums and evaluate quarterly.

Plan major expenditures: Talk to your spouse about the big-ticket items like:
  • Vacations: summer, winter and weekends away.
  • Special events such as weddings, special anniversaries.
  • New vehicles to purchase.
  • Other items costing more than $1,000.
Rebalance: January is a great time to have you or your financial adviser rebalance your portfolio. If you invest on your own and need help rebalancing, I can assist for little or no charge. Call me at 760-535-1621.

Taxes: Don't buy into just any tax-saving, deductible plan. Big mistakes ensue with a hurried attitude.

CPAs and tax attorneys are adamant: The total you are able to save each year is much more important than how much is tax-deferred. Please don't get trapped into the idea that if you can't deduct, it isn't worth saving. All the early retirees I know made their fortunes on after-tax investments, not tax-deferred.

That said, it is best to save in a tax-deferred environment, as long as fees and employee expenses don't eat up all your gains. Doctors today can easily deduct up to $49,000 ($54,500 if over 50) with simple, inexpensive 401(k)s or SEPIRAs. There are more exotic flavors of tax deductibility, yet beware of high fees.

The 70 percent rule: If you, the doctor, are not receiving 70 percent or more of the benefits of a retirement plan after subtracting out fees and employee contributions, then it rarely makes sense to have that plan.

Don't blindly trust a dental consultant and stay far away from insurance companies' offerings. Make sure your CPA or tax attorney agrees to any retirement plan offered. Vanguard offers clear basic advice.5

References
  1. www.moneywatch.bnet.com/retirement-planning/blog/retirement-roadmap/the-inflation- conspiracy/4001/?tag=col1;blog-river
  2. Greg Daugherty, "Where You Shouldn't Invest" CR Money Adviser, Aug., 2011.
  3. www.fsoondemand.com/adsfees.aspx
  4. www.ada.org/members/1443.aspx.
  5. www.personal.vanguard.com/us/whatweoffer/smallbusiness/individual401k?Link=facet.
Author’s Bio
Douglas Carlsen, DDS, owner of Golich Carlsen, retired at age 53 from private practice and clinical lecturing at UCLA School of Dentistry. He writes and lectures nationally on financial topics from the point of view of one that was able to retire early on his own terms. Carlsen consults with dentists, CPAs and planners on business systems, personal finance and retirement scenarios. Visit his Web site: www.golichcarlsen.com; call 760-535-1621 or e-mail at drcarlsen@gmail.com.
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