Retirement Is No Pipedream for Baby Boomers and Gen Xers
It’s not too late to begin planning for your golden years
Younger baby boomers (people in their late 40s to mid-50s) and Gen Xers (those who are ages 38 to 47) are being urged to get on track with their retirement savings now or possibly face a financially difficult retirement, much worse than previous generations.1 Unfortunately, too many are not preparing for retirement as they should be. Dental assistants may be no different, and they still need a comfortable retirement.
If a dental assistant has not started a retirement plan until his or her 40s or 50s, it is not too late. The dental assistant should be concerned about retirement. Many factors can arise, such as declining health. Of course, each person has his or her own expectations for income needs. At retirement, those needs become more important because the sources of income available to fund the retirement are typically in lesser amounts than when working.
Social security benefits are an added source of income, which many people disregard because they believe it will be depleted when they retired. This has been a common belief for as many years as this author can remember, but most advisors reflect social security income in their planning and retirement strategies for their clients. At this point, predictions about social security are based on speculation; politicians may be able to devise solutions in the coming years.
By starting a retirement plan later in life, the dental assistant may have less available at retirement because the funding of the plan will be for a shorter timeframe. As an example, if someone starts the plan at 40 and funds it until age 65, that individual will have 25 years of contributions. If someone began the funding at age 25 and stopped it at age 65, it stands to reason that much more would be available. At many financially sound dental practices, retirement plans are available for employee participation with some sort of company match. That type of plan is optimum for a dental assistant because the accumulation of assets in the plan would come from both the dental assistant and employer.
How Much to Save
To determine how much someone 40 or older should be saving is really a job for the dental assistant’s financial advisor. If the dental assistant has a reasonable understanding of money, the task can be performed without the need for assistance. For those less comfortable with that task, retaining an advisor who has some experience with dental practices can greatly assist in the analysis. The amount charged for the consultation would not be that much if the dental assistant is well-prepared for the consultation appointment. Advisors who are interested in this type of work may offer a free telephone consult and advise the dental assistant on how to prepare for a meeting. This may mean the dental assistant does the detail work and prepares a good history for the financial advisor prior to the meeting. This work beforehand will give the advisor the tools necessary for compiling the dental assistant’s financial picture within a one-hour conference. The advisor can suggest just how much the dental assistant should be saving for retirement and how to build a portfolio of investments.
Type of Plans and How Much to Invest
Because some dental practices offer retirement plan participation, the first choice for the dental assistant would be the addition to the dental practice’s plan. The dental practice almost always has a plan in which the employee has the opportunity to contribute and then the employer dental practice has some type of match, in which additional funds are added to the employee share. This allows the plan to increase more dramatically than having the dental assistant fund his or her plan independent of the practice.
The employer plan is one of the best ways to save for retirement because the dental office can provide part or all of the contributions. As an example of the quick potential growth and savings available for a dental assistant, suppose that $2000 was invested by the dental office on behalf of the assistant each year into the dental practice retirement plan. In 15 years, the value of that fund, if invested safely at only 4%, would equal $44,657. If the dental assistant had more than 15 years in the dental practice retirement plan, the savings would be greater. Some retirement plans such as 401K and simple IRAs allow contributions from the participant, as well. With modest contributions by the dental assistant over this hypothetical 15-year span, upward of $50,000 could be available at retirement.
If the dental assistant does not have the option of an employer-qualified plan, advice as to which plan to start would be based on the dental assistant’s ability to fund that particular plan. An advisor would suggest the highest amount possible that can be contributed, based on the dental assistant’s ability to maintain the lifestyle to which he or she has become accustomed. For a dental assistant in his or her 40s and 50s, “suffering” today for tomorrow’s retirement may also be suggested. This means forsaking something “frivolous” today is well worth the protection afforded for retirement’s lifecycle. Many plans are available, and the best way to navigate this territory is using the advice of a planner. Everyone’s situation is different, so this author believes a general suggestion may not be useful. An advisor should not suggest any plan without knowing the dental assistant’s finances.
CDs and Saving Bonds
Advisors would not recommend CDs and U.S. savings bonds as top choices unless the dental assistant was unconcerned about account growth and was interested only in protecting the principal. CDs are insured, and government bonds have the guarantee of the government so they present practically no chance of loss. That almost 100% guarantee also reflects the return available, which is negligible. The knowledge that the contribution to the retirement plan is a deductible expense and the income in the plan is not taxable until withdrawn should allow somewhat of a secured risk for the dental assistant. Advisors will typically not suggest these types of investment instruments because these devices have virtually no growth factors attributed to them and pay little interest.
What You Can Do
An older dental assistant should begin his or her own retirement plan if dental practice has no retirement plan to offer. The type of plan should be chosen after a discussion with an advisor. Paying down high-interest debt such as credit cards is an important factor for savings. Sometimes using equity in a home that may be borrowed today at about 3.5% or lower and using those funds to pay credit card debt will save a tremendous amount. Interest expense on credit cards is not generally tax deductible, but interest paid on a mortgage commonly is.
Another point to consider is asking the practice owner or office manager for a reallocation of income so that less is taxable. As an example, if the dental practice offers flexible spending accounts, an amount used for medical expenses by the dental assistant personally could be allocated to the flexible spending account. The dental assistant would have significant savings by doing so. If $1000 of taxable salary were reduced to zero and those funds were allocated to the flexible spending account, the social security tax of 6.2% and the Medicare tax of 1.45% would be eliminated. The income tax would be reduced as well based on the dental assistant’s tax bracket. Let’s say that we use a 10% income tax bracket. If the $1000 counted as gross payroll, the employee would have lost $62 to social security, $14.50 to Medicare, and $100 to income tax in this example. That would leave the employee with $823.50 net from the paycheck to pay for medical bills. With the use of the flexible spending account, the employee would have the entire $1000 without those deductions. Many other fringe benefit plans may be available through the dental office that do not require a raise in pay but merely a reallocation of existing pay to have more net spendable money in hand.
No matter where you are in your dental assisting career, you should start saving for retirement and start some tax-wise strategies. Obtaining advice through a financial planner is a prudent strategy.
About the Author
Bruce Bryen, CPA, www.bryen-bryenllp.com
1. Hicken M. CNN web site. Gen X to Be Worse Off than Boomers in Retirement, Study Finds. http://money.cnn.com/2013/05/16/retirement/retirement-saving. Accessed November 25, 2013.