Dentists: Innovative Ways to Keep the Cash Coming In!

Posted on October 3, 2011 by Bill Faiferlick

Successful, self-employed professionals are making certain assumptions. In this instance, it’s regarding asset accumulation and retirement.

There are 4 specific areas that should not be overlooked in the financial planning process that are often ignored.

  •  The length of retirement and the resulting massive amount of capital required, (this is grossly underreported in the media)
  • Systematically increasing your wealth by ensuring your money works at least as hard as you do  - this requires taking advantage of misunderstood or frequently pre-maturely dismissed tax opportunities which you are legally entitled to,
  • Knowing the true cost of medical coverage, and how to establish pre-funded accounts utilizing pre-tax dollars instead of after-tax dollars throughout retirement (this alone will save you $300,000 to $400,000),
  • Discovering how to leverage the sale of your practice to secure the greatest return for you and the purchaser – this involves adopting strategies that will save the buyer a few hundred thousand dollars making your practice unbelievably financially attractive because years of debt repayment for the purchaser have been eliminated.

As record numbers of baby boomer dentists approach retirement this decade, many will discover too late that their retirement years and the comfort and security they’ve come to anticipate may be more of a dream than reality!

The culprit is two-fold; longevity and recent systemic economic decline. Financing any retirement period over a protracted period of time – twenty to thirty years – cumulatively necessitates massive capital accumulated in the millions of dollars prior to retirement.

Forestalling the adoption of legal accumulation strategies means you are part of the epidemic of Americans who fail to plan and save for their retirement. You choose to believe that next year you’ll start looking into how you could accumulate more and will start saving more next year. Many studies confirm this belief (expecting to save in the future) and the results show that people’s intentions are not consistent with their actions and they fail to save. This postponement is of epidemic proportions in the US and is by far the single greatest risk to the creation of sustainable wealth or wealth for life. Failing to take action will have one consequence unless you win the lottery or inherit substantial wealth, you have given up and have accepted the idea of living a sub-standard life the last twenty to thirty years of your life.

If your objective is a sustainable $100,000 per year of fully taxable income (remember your tax rate took a jump due to the lack of deductions, so consider you’ll be paying 30%) indexed over twenty years at 3% annually, the amount needed in liquid assets at the onset of retirement is $3,742,364. For $200,000 a year fully taxable income the need is $7,484,728. Unless you expect to completely deplete your estate, your net worth would have to be well in excess of $10 to $12 million with at least one-half in fairly liquid assets.

The hidden risks in real estate

I realize many dentists have extensive real estate portfolios; however, due to the nature of unexpected financial needs (like immediate medical expenditures, for example), real estate while possessing many recognizable benefits also has several drawbacks.

It can be hard to dispose of quickly without major discounting. It takes time to free up significant cash without selling a property. If accessing a line of credit or increasing the encumbrances on the property is how cash is accessed, this in turn creates an increased financial long-term drain to service the new debt load.

The most obvious drawback is that real estate can unexpectedly drop in value for many years (or decades in some regions) during market cycles. Liquidation is possible but in so doing your tax obligations increase significantly when it’s sold using up more valuable capital.

Typically, it is safer not to view this real estate as an immediate source of funds when large unexpected events occur and cash is needed.

The goal should be to have significant cash or other liquid investments available.

How to supercharge your wealth

You are entitled to more than what you’re currently benefiting from. You’re entitled to take advantage of legal strategies which will assure you a higher hourly income than what your hands may produce.

While successful individuals, professionals, and business owners fight their ongoing battle of cost containment to maintain tight margins or profits, they unknowingly are not availing themselves of the single greatest expense, their tax liability!

Unbeknownst to them, Uncle Sam has as far back as 2000 made available through the adoption of owner or professional benefit plans exceptionally large tax deductions ranging from $80,000 to $350,000 annually which immediately decreases tax liabilities often to less than 1/2 of what you are currently paying. This is a meaningful tax opportunity and strategies like this are available that your accountant has little familiarity with.

Instead of accepting the prevailing assumption that there is little one can do to accumulate substantial sums of money without working harder or trimming margins, in reality, there are solutions to substantially increase your assets to achieve sustainable wealth.

Enhancing Productivity to Increase Your Personal Wealth

What’s the real cost of being less productive and not taking advantage of opportunities you’re entitled to?

To benefit from higher productivity scenarios, an understanding of productivity profitability can increase your net income by 22%-40%, and materially augment your net worth in a few years. This single realignment by itself without changing how you practice can enhance your wealth accumulation.

Example:

A practitioner has annual billing of $3 million with pre-tax income margins of 10% and a combined tax rate of 40%. He will retain income of $180,000 annually or a net hourly income of $86.54 based on working 2,080 hours a year.

With productivity profitability modeling, using the same annual billing of $3 million annual billing with a pre-tax income margin of 10% and a combined tax rate of 20%, you will have a retained income of $240,000 annually, or a net hourly income of $115.38 based on working 2,080 hours a year.

This is an increase in retained income as a percentage of 22.22%.

There is NO investment risk, NO market timing, just BETTER utilization of the existing tax codes as their intended benefits. You’ll experience a higher return dollar for dollar than any advisor could ever return simply by retaining more of your earned income. If you add a small conservative return to this, your return can range in the high 20% each and every year.

Options to adequately anticipate and pre-fund retirement medical costs

Medical care and having sufficient disposable assets to pay for it will be the single largest expense you will undeniably face at one time or another in your retirement years.

Pre-funding medical costs on a tax-deductible basis can improve current profitability and decrease the rate of capital depletion during retirement.

Whether you are self-employed or working for a company, you are to some extent at the moment insulated from issues facing millions of current retirees each year; that being the long term cost of medical coverage.

Even modest coverage is frightfully expensive especially when considered for an extended period. To say a large capital outlay is required is an understatement. Additional factors may compound the costs; your age, double-digit increases which are expected to continue unabated for years to come, and the likelihood or risk of having a pre-existing condition at some point in time which precludes many from coverage even if you can afford the premiums.

Medical coverage or expenses are generally absorbed by your practice while working. Typically, these costs are reflected as expenses and are calculated back into your practice simply as another cost of doing business.

Once you retire, these costs are reborn as after-tax expenses and are no longer deductible expenditures without the benefit of your practice. You will be paying medical premiums with after-tax dollars.

For every dollar spent on health care assuming you’re only in a 30% tax bracket, you will have to earn $1.45 as pre-tax income before $1.00 is available. In states where the combined tax rate approximates 50%, $2.00 in before-tax income is required before $1.00 is available.

Social Security and Medicare are drastically changing what they will pay or cover. A larger than anticipated portion of your pre-tax income will have to be permanently allocated and taken out of circulation for health care costs at the expense of life’s other pleasures for the remainder of your life.

Monthly premiums and co-payments are tied to your income; with incomes less than $80,000 there is one premium, over $80,000 annual for a single person there’s a higher premium, and for married couples its $160,000. That’s right! Your benefit and outlays are income sensitive unlike in previous years. The higher your income, the less you’re entitled to unless you agree to a larger monthly payment and or a higher yearly out-of-pocket expense. What I believe people will find shocking is the total cost individuals will pay for government issued medical coverage assuming retirement age is 65 and death occurs either at age 90 or 95. Individual premiums and co-payments for this 25 -30 year period are expected to cost individuals between $300,500 and $558,000 depending on health care inflation per person until death at age 90. By extending coverage to age 95, the cost skyrockets to between $615,000 and $907,000 per person.

Now, take this off the top of your retirement income each month or subtract it from your capital account. How will this directly affect your long-term spending habits? I suspect it will put a crimp into some of your plans regarding your security and retirement.

  • The medical coverage premium from above was just for the basic costs of government issued health care coverage which only covers about 50% of the coverage you’ll need.
  • How many of us want to be saddled with this and only this type of coverage? Consider what this basic coverage doesn’t or can’t cover in the future.
  • A onetime major medical treatment can cost $40,000 or more assuming there are no on-going rehabilitation, other medical services or medication required.
  • Medical prescriptions, co-payments, rehabilitation due to disease or injury, and major medical conditions like heart attack, limb, hip or joint replacement, and prescriptions costs have not even been factored in.
  • Ask yourself this; how many of us know of an older individual who has cruised through retirement without a scrape?
  • How many retirees have had or are experiencing medical ailments or lingering physical limitations? This doesn’t even touch long term care facilities which frankly few of us at that point will have any say about, certainly not without considerable assets.

We, realistically, do not have the luxuries our parents had in expecting fully-funded and relatively low cost coverage. There was a book out a number of years ago titled “Who Moved My Cheese?” The emphasis was that people need to be flexible and adapt as work situations change. The cheese has not only been moved but we’ve already eaten most of it.

Being able to afford medical coverage beyond government plans to receive the care you want can be painfully expensive without eroding significant financial resources. Failing to change with the times and plan accordingly, by not understanding the future costs which for many of us aren’t that far away, could leave us destitute. With insufficient capital none of us can go back and relive the last decade and acquire the necessary capital.

Leveraging the sale of your practice to secure the greatest return for you and the purchaser

Unfortunately, there is a dramatic shift away from future dentists financially encumbering themselves (to the tune of $500,000 to $1 million or more to purchase a practice) with decreasing certainty they’ll ever be able to recoup this expenditure when they eventually retire decades into the future.

This phenomenon is not limited to the dental profession as business owners are now also discovering this new sobering reality. With the emergence of this trend and the obvious potential loss of what would have been retirement capital, those who are currently working need to learn how to immediately take advantage of every available opportunity. Otherwise, the reality will be that most will find themselves working well after they had expected to retire. The second realization is that they’ve missed out on beneficial strategies because they’ve come to rely on their accounting professional – as gatekeepers or pre-qualifiers of opportunities – costing them millions in lost wealth accumulation.

Selling your practice is not as simple as finding a buyer – that is if you want to sell the practice for your anticipated sales price. Structuring the sale of your practice can mean notably more money in your pocket and a practice that is more attractive financially providing a great incentive to any potential buyer for your practice.

While selling your practice may be simple enough, there is a very specific process you should entertain before you advertise your practice for sale to increase or sustain your asking price. This involves adopting strategies that will structure the sale of your practice to save the buyer a few hundred thousand dollars or more (depending on the sale’s price) and will make your practice unbelievably more attractive financially because years of debt repayment for the purchaser have been eliminated and you benefit from a reduced tax liability which could save you a few hundred thousand as well. These are substantial after-tax sums by any measure.

What if I described a strategy where the purchaser was able to claim approximately half of the purchase price as a taxable deduction, thereby reducing the overall amount the purchaser will eventually repay in the form of loans and interest when they finance the purchase of your practice?

What if the sale of your practice could be structured so it didn’t cost the purchaser $1.54 million to purchase your $1-million business or practice?

In this hypothetical scenario, the purchaser saves $240,000.

How much would the purchaser, depending, of course, on his occupation, have to bill in goods or services to generate a net income of $240,000?

If your profit margin were 10 to 20 percent, at 20 percent the gross practice billing would be $1.2 million to net $240,000.

With a 10 percent profit margin, the gross billing would increase to $2.4 million to maintain the same $240,000 net income.

Let’s relate this to man-hours: how many months are required for you to bill $1.2 million or $2.4 million?

By adopting tax-smart strategies, the deductions benefit the purchaser which will definitely facilitate the sale for the seller. This strategy drives down the total overall cost to the purchaser by a significant amount.

The other benefit is to the seller who is also able to immediately lower their tax obligation by making a contribution from a portion of the sales proceeds directly into their retirement plan – providing the funds are not required immediately.

The higher the sale price, the greater the potential savings to both the buyer and the seller. This type of innovative, strategic planning will help ensure you receive the highest price for your practice at a time when practice values are declining and fewer individuals are willing or qualified to assume large debts in a turbulent, unpredictable economy.

Using tax-smart strategies, the seller can make the practice more attractive to potential buyers, reduce the cost of purchasing the practice and increase the return on investment.

If having the availability of significant cash is one of your objectives, then appropriate protection and risk management strategies must be adopted which employ higher degrees of sophistication. A law suit is filed every thirty seconds in the U.S. Simply following the run of the mill advice of putting everything into a trust will not suffice.

By utilizing these and other strategic financial strategies, sustainable wealth is either created or accelerated. After all “It’s You Money!