Top 5 Financial Planning Mistakes Made By Dentists
Avoid common pitfalls and develop a personalized plan
Dr. Levin recently sat down with John G. McCarthy III of Heritage Financial to discuss how dentists can avoid the most common financial planning errors and keep their retirement planning on schedule.
Roger P. Levin, DDS (RL): What financial planning mistakes are general dentists and specialists consistently making?
John G. McCarthy III (JM): The biggest one is procrastination. Like many professionals, dentists tend to put off financial planning until later in their career. They mistakenly believe it’s something they don’t need to do when they start out—after all, retirement is decades away.
RL: Once you’re in practice, the decades tend to fly by.
JM: Absolutely. You get busy building a career, starting a family, living your life, and before you know it, as many middle-aged dentists can attest, you’re in your late 40s or early 50s and suddenly you realize retirement is fast approaching, and you have done little to prepare for it.
RL: Isn’t it also important to have your plan updated every few years?
JM: As your life changes, your plan must evolve as well. For example, some dentists will have a financial plan completed when they’re starting out, but then they won’t update the plan for 10 or 15 years, believing they’ve got it all covered. Unfortunately, the financial plan you need when you’re 28 is not the same one you need at 35 or 39 or 41. You have changed—so have your circumstances, including your practice, your income, your living expenses, and your financial goals.
RL: Do dentists have an accurate idea of how much money they need to enjoy a comfortable retirement?
JM: Most of them don’t. With the future of Social Security uncertain, your individual savings are more important than ever. Keep in mind that because people are living longer, healthier lives, your retirement dollars may need to last a long time. The average 65-year-old American can currently expect to live another 19 years. However, that’s the average. Many dentists can expect to live longer—some much longer—lives.
RL: Are dentists using the right savings vehicles?
JM: Probably the best way to accumulate funds for retirement is to take advantage of IRAs and 401(k)s. Most dentists have an inadequate amount invested in these plans. The reason IRAs and 401(k)s are so important is that they combine the power of compounding with the benefit of tax-deferred growth. For most people, it makes sense to maximize contributions to these plans, whether it’s on a pre-tax or after-tax (Roth) basis.
RL: Do you see dentists making good investment choices?
JM: Many dentists err by investing either too conservatively or aggressively. We have seen younger dentists with the majority of their savings going into low-risk investments, such as bonds, slow-growth mutual funds, and even money market accounts. On the opposite end of the spectrum, we have seen older dentists—especially those playing “catch-up”—whose portfolios were weighted too heavily in high-growth and high-risk funds.
When you retire from dentistry, you’ll have to rely primarily on your accumulated assets for income. To ensure a consistent and reliable flow of income for the rest of your lifetime, you must provide some safety for your principal. A dental-knowledgeable financial professional can help you strike a reasonable balance between safety and growth.
RL: What other investment mistake do you see dentists making?
JM: Many dentists lack a diversified portfolio. “Putting all your eggs in one basket” is a bad approach when it comes to saving for your retirement. If all of your money was invested in one sector of the economy, then that sector suddenly slumped—remember the tech bubble of the early 2000s—your portfolio would be at significant risk. Diversification helps reduce your risk over the long term.
Every dentist wants to reach financial independence at a reasonable age. Retirement should be a time of enjoyment, not of worry and anxiety due to insufficient savings. The goal of financial independence can be delayed by five common mistakes:
• Not starting the financial planning process early enough
• Not updating your financial plan
• Not saving enough for retirement
• Not maximizing tax-favored plans
• Not having a balanced and diversified approach
Consulting a dental-knowledgeable financial planner can help dentists devise the right plan for their unique situation, putting them in the best position to reach their retirement goals on time.
The comments in this article are not meant to be taken as financial advice. Levin Financial Group recommends that you always consult with your financial planner before making any significant changes in your financial situation.
Levin Financial Group has an affiliation with Heritage Financial.
About the Author
Roger P. Levin, DDS, is a third-generation general dentist and the chairman and chief executive officer of Levin Group, Inc. To learn how to run a more profitable, efficient, and satisfying practice, visit the Levin Group Resource Center at www.levingroup.com/gp—a free online resource with tips, videos and other valuable information. You can also connect with Levin Group on Facebook and Twitter (@Levin_Group) to learn strategies and share ideas.