On the surface, one would think that medical professionals like doctors and dentists would be financially secure.  After all, the average primary care physician salary is $223,000 based on a 2018 Medscape Physician Compensation Survey, with some specialties making considerably more.  Cardiologists, orthopedic surgeons, and plastic surgeons can make $400,000 to $500,000 per year. Similarly, the average dentist makes about $200,000 per year, but specialists and dentists who own their own practices can make $300,000 to $420,000 or more.  However, despite these salaries, not all doctors and dentists are prepared for retirement.  There are two factors working against them.  First, is the incredibly long time in school – 4 years in undergraduate, 4 years in medical or dental school, and 3-7 years in a residency program for doctors.  The second factor is the debt load; 75% of physicians graduate with student loan debt averaging more than $200,000 and a career that doesn’t really start becoming profitable until their 30’s.  The average student loan debt for dentists is even worse – a staggering $292,000.

The Early Years: (ages 30-45)

Saving for retirement is challenging when combined with large student loan payments.  34% of doctors at retirement said that they wished they had begun saving earlier in their careers.  Among female doctors, 60% are not maximizing their contributions to a retirement plan, and 45% of male doctors are falling short of the maximum contribution.  Because of the delay in their earning years, it is recommended that doctors and dentists contribute 15-20% of their income to retirement savings.

Retirement plans are generally available to doctors who are part of a larger medical group or hospital.  401(k), 403(b) and 457 plans are typically a standard part of the benefits package.  However, for smaller practices and dentists that are independent, care must be taken to implement a plan that will allow them to save sufficiently for retirement while not becoming too costly or burdensome to administer.  Doctors and dentists who work with a CERTIFIED FINANCIAL PLANNER™ early in their careers can get the help that they need in reducing their student loan debt, evaluating the right retirement plan for their practice and taking advantage of the time value of money.

The Middle Years: (ages 45-60)

For medical professionals in their peak-earning, middle years of their careers the focus begins to shift from debt reduction and retirement savings to succession planning and transitioning to retirement.  This is the time to begin thinking about what retirement may look like.  How much is needed in financial assets to maintain your lifestyle?  When would you like to retire and where?  Planning for retirement has both financial and emotional consequences.  Having a financial plan helps doctors and dentists achieve their goals and gives them the freedom to consider different scenarios.

Succession planning for a small practice can be difficult depending on location.  We recommend starting to actively recruit for a successor 5-10 years before your desired retirement date.  The proper practice structure (S-Corp, Partnership, etc.) needs to be in place, and the details of any buy-out take time to iron out.  To maximize the sales price there will likely be some overlap of duties wherein the seller continues to work in the practice to transition to the new owner which may range from 1-5 years after a deal is struck.

The Later Years: (ages 60-70)

It was surprising to learn that the average age for doctors to retire was 68 – 5 years longer than the general population (age 63).  Some doctors and dentists choose to ease into retirement by continuing to work part-time.  This can be advantageous on two levels.  First, it may facilitate the transition in the succession to a new provider.  Second, and equally important, it allows the retiring medical professional to adjust to their new life, develop outside hobbies and interests and ease the emotional transition.

Working with a CFP®, CPA and attorney is critical at this point to ensure that taxes are minimized on the sale of the business.  January 1^st closing dates are preferable so that the practice sale proceeds do not overlap with the practice income.  Retirement plan contributions should continue to be maximized, and any capital losses harvested in the years of the sale.  The CPA should allocate the maximum reasonable portion of the sales price to assets (such as dental equipment, furnishings, etc.) that are taxed at favorable capital gains rates.

The selling doctor or dentist should maintain their business structure (S-Corp or LLC) after the sale.  If the purchaser contracts with them to provide services after the sale, payments would be made to the seller’s business and the seller can continue to maximize their retirement plan contributions, provide company-paid medical insurance, reimburse dues and subscription expenses, and other practice perks such as continuing education.  This will drastically cut the selling doctor’s income taxes.

If a move to a lower or no-income-tax state is part of the plan, the selling doctor or dentist should establish legal residence before receiving the practice sale proceeds or withdrawing from his/her retirement plan.  A delay here can be costly.  For example, the sale of a practice for $1,500,000 in Oregon would cost a dentist $148,000 in state taxes vs. zero in Washington state.

Finally, even in retirement, the need for liability insurance persists.  Medical professionals should talk to their insurance agent about providing “tail coverage” against future claims.  Your attorney should be able to provide guidance on your state’s requirements for record storage and retention, client notification, and licensing requirements.

It has been our pleasure to help doctors and dentists throughout the various stages of their careers and retirement.  Please contact us if we can help you.