Financial Planning Begets Savings, Savings Begets Success

By Sam Martin, MBA (tax), CFP®, CPA

 

OK, so perhaps that line sounds a little biblical—but I have personally observed it as the truth. Most dentists are fairly successful financially and some are quite successful.

Write Down Your Goals
Alternatively, we have observed that those who write down their goals and quantify them are much more likely to save at a rate that will greatly enhance the probability of attaining a financially comfortable retirement. Likewise, we see evidence that approaching the non-financial goals with equal formality also greatly enhances the probability of a happy and fulfilling life. So what is holding you back?

Goal Setting: Not Rocket Science
Think about this—establishing goals is just getting onto paper that which, at this time, you think you would like to accomplish during your lifetime. The only thing that might be difficult is getting on the same page with your spouse and this is where important conversations can really help.

Let’s look at a typical set of financial planning goals. When working with spouses, we make sure to get input from both and to ask if you agree with that goal—or how important that goal is to the other spouse.

Linda & Harvey
Here’s a set of goals from a recent discovery meeting:

Linda: Age 50, general dentist, owns her office
Harvey: Age 57, good job within a major international firm

1. Complete higher education funding for son and daughter
2. Help kids get started in life after college—maybe help with firsthome purchase
3. Kids, work, service and charity
4. Linda—retire at age 62
5. Harvey—retire at age 62
6. Monthly inflation adjusted after-tax retirement income requirement $14,000
7. Have confidence in our retirement plan, accumulations—peace of mind
8. Determine how much we need to be comfortable
9. Identify and deal with any “weak spots” in our planning
10. Help Harvey get retired
11. Have option to downsize home eventually
12. Transition practice in 12 years
13. Traveling
a. Cruise
b. Hawaii
c. Houseboats/sailboats
d. International: See the world with kids
14. Yoga
15. Hiking (Harvey)
16. Golf
17. Boating (Harvey)
18. Biking (Harvey)
19. Dining Out
20. Vacations—three per year

The only rocket science in these goals is the fact that this couple already has a pretty good idea of how much income it will take to live comfortably by their definition.

Determine What You Are Currently Spending
The reality is most folks don’t have a clear idea of what would make a comfortable living or even know what they are currently spending. But no worries. First off, with a little bit of work, you can come up with your current spending using software or simply using three months of bank and credit card statements and adding the few items that are paid annually or semi-annually.

Secondly, unless you are retiring very soon, your first cut at goals doesn’t necessarily need to be that accurate. For some, it is more like throwing a dart at the wall to get started. But once you get started, updating and fine-tuning becomes pretty easy—much easier than getting that first set of goals together. So don’t sweat too much over the goals—your initial set will not be permanent.chart

Personal Budget Categories
If you know what you spend now, you can extrapolate into retirement (in today’s dollars). Here is a typical list of personal budget categories:

Start by filling out the “Now” column. Adjust the row titles to add, subtract or modify each of the expense categories. In our office, we don’t have you worry about income or FICA taxes as we will compute these for you and the future projections will have income taxes built-in. But you will add in specific items like education funding, kid’s activities, etc.

Determine Retirement Budget in Today’s Dollars
Once you know what you are spending now, simply go through each row and determine in the “Retirement” column what you expect to spend then—in today’s dollars. Some expenses may go away altogether—such as expenses related to employment, kids, education funding, debts and mortgages.

Other expenses may increase such as travel—particularly during early retirement. Medical expenses may be highest at pre-age 65 and then decline some. You may add or subtract other insurances—such as adding long-term care coverage and subtracting life and disability policies.

Now deduct your expenses from your take-home income and you now have at least a decent dart to chuck at the wall. Fire away.

The Planning Process: Software is Key
Due to the complexities of rates of return, income taxation and inflation to name a few challenges, software is necessary. The internet is full of calculators, some better than others. Fidelity Investments has planning software I like and can be found at their Planning and Guidance Center: https://www.fidelity.com/calculators-tools/planning-guidance-center.

Financial Planner Provides Accuracy & Accountability
For most of us, using a professional financial planner is probably most beneficial as it takes some knowledge to properly use planning software and to be able to assess the output’s accuracy. Further, and extremely important, working with a planner provides that ever important point of accountability most of us need to accomplish our goals.

Other Financial Plan Elements
In addition to projecting retirement income, our plan includes a number of other elements. It may include:

1. Education funding
2. Debt reduction or management plan
3. Estate planning (with or without tax planning as needed)
4. Risk management and insurance evaluation
5. Wealth enhancement:
a. Tax planning
b. Practice-integrated planning
c. Practice profitability and value planning
6. Practice transition planning
7. Charitable planning
8. Any number of one-off items
unique to you

Turning into a Better Saver
Once we have an initial draft of the plan, it will require some additions. These things, I think, are the things that turn folks into better savers:

1. Funding Goals
Examples:
a. Continue to fully fund the 401(k) plan for Linda through the office: $53,000 per year
b. Fully fund Harvey’s 401k through work: $24,000 per year (plus
employer matching)
c. Fund joint brokerage account:
$2,500 per month
d. Put extra $2,000 per month
on the primary mortgage
2. Periodic preset update meetings
a. Quarterly or semi-annual
meeting to review progress
and make adjustments

The savings plan helps you to be deliberate in terms of where money is going. The update meetings provide the accountability points to provide further incentive to work your plan. If you are having trouble achieving your savings goal, this will come up sooner versus later when you have preset meeting dates. Often, more work is necessary on the personal budget and with the practice.

An Exceptional Value: Dental Practice-Integrated Planning
Dental practice-integrated planning can be of exceptional value. Typically, the practice is the engine behind the funding goals. Where take-home dollars are insufficient to cover the personal budget and the funding goals, we can often look at practice profitability and find a way to improve the bottom line. For example, in the typical practice, an additional $250 per day non-lab procedure can amount to $42,000 per year pre-tax or perhaps $28,000 per year after-tax. Accomplish that rather modest daily objective and the additional funding goal is met.

Written Goals, Plan & Monitoring = Better Savings
Putting your goals in writing, establishing a plan and a regular monitoring process will make you a better saver. Better savers are not only much more successful in the financial long-term, but they also have a higher quality of life knowing they can. As Linda and Harvey included in their goals, they wanted to “have confidence in our retirement plan, accumulations—peace of mind.”

 

Sam Martin is Director of Wealth Management Services and Advanced Tax Planning for the Dental Group, LLC / Martin Boyle PLLC / Dental Wealth Advisors, LLC, a CPA, practice advisory, financial planning and wealth management services group exclusively serving dentists and their practices. Sam is a Certified Public Accountant (CPA), a Certified Financial Planner (CFP), and holds a master’s degree in federal income taxation. Located in Kirkland, Washington, Sam can be reached at 425.216.1612 or Sam@cpa4dds.com. 

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