Dentists are healthcare professionals who diagnose and treat problems with the teeth and mouth. Like other professionals, they need to plan for retirement early and often.
Why dentists may need to plan for retirement early and often
Find a financial advisor you can trust
This is the most important because Dentists are always working in and on their practice. Having a fiduciary“quarterbacking,” your financial household will ensure that you have the right team behind you for the financial aspect and point you in the right direction for the legal and tax (IRS) components.
Dentists may have high administrative costs
Dentists often have high expenses related to practice owners, such as purchasing and maintaining equipment, paying rent or a mortgage on a practice location, and paying eligible employees. These expenses can make it more challenging to build up your retirement savings.
Dentists may have student loan debt
Many have a significant amount of student loan debt from their dental education, making it harder to save for retirement.
Dentists may have a higher earning potential.
They typically have a higher earning potential compared to many other professions, which means they may need to save more for retirement to maintain their standard of living in retirement.
Dentists need to start planning for retirement as early as possible to ensure they have sufficient financial resources to support themselves during their retirement years.
Retirement Strategies for a Dentist
Several retirement plan options exist, such as 401(k) or any qualified retirement plan.
Contributions to a 401(k) are made on a pre-tax basis, meaning the money you contribute is tax deductible. This can reduce your taxable income and help you save on federal income tax.
Some employers may offer matching contributions to a portion of the contributions made by their employees in a safe harbor 401(k) plan, SEP IRA, Simplified Employee Pension, or any other type of savings incentive match plan for employees. This can help you save more for retirement and increase the overall value of your account.
Individual Retirement Accounts (IRAs)
Individual Retirement Accounts or IRA accounts are tax-advantaged investment vehicles that allow individuals to save for retirement. As a dentist, you may be able to contribute to a traditional IRA or a retirement plan sponsored by your employer, such as a 401(k) or a pension plan.
This can help you save more for retirement and take advantage of the tax benefits of both types of accounts. It’s important to remember that IRAs have income and contribution limits and other rules that you and your CPA should be aware of when deciding whether an IRA or Roth IRA is right for you.
Health Savings Account (HSA)
A Health Savings Account (HSA) is a tax-advantaged savings account that can be used to pay for qualified medical expenses, such as deductibles, copays, and prescription drugs. As a dentist, you may be eligible to contribute to an HSA if you are enrolled in a high deductible health plan (HDHP) and do not have other disqualifying coverage, such as a traditional health insurance plan or a flexible spending account (FSA).
HSAs can be a good option for individuals who want to save for future medical expenses and take advantage of the tax-free distributions of the account.
Taxable brokerage account
A taxable brokerage account is an investment account, not tax-advantaged, meaning you do not receive any up-front tax benefits for contributing to the account. However, a taxable brokerage account offers flexibility regarding the types of investments you can hold and the ability to withdraw your money at any time without penalty.
Another benefit of a taxable brokerage account is that it does not have the same contribution limits or restrictions as other investment accounts, such as IRAs or 401(k)s. You can contribute as much as you like to a taxable brokerage account, subject to any limitations on your income or the amount of money you have available to invest.
Investing in real estate can offer several benefits for dentists and other investors, including the potential for long-term capital appreciation, regular cash flow in the form of rental income, and potential tax benefits. One benefit of real estate investing is that it can provide a tangible asset you can hold onto for the long term.
Questions Dentists Should Ask Before Starting Retirement Planning
Here are a few questions that a person in the dentistry field may want to consider before building a retirement plan.
- What are my retirement goals?
- Do I want to retire at a certain age?
- Do I want to maintain a certain standard of living in retirement?
- Do I want to leave an inheritance to my children or donate to charitable causes?
- A clear understanding of your retirement goals can help you choose the best retirement plan for your needs. Working with a trusted financial advisor specializing in financial planning can help guide you through this process.
How much will I need to save for retirement?
You will need to consider your expected retirement age, your anticipated expenses in retirement, and any income you may receive from other sources (such as Social Security or rental properties) when estimating how much you need to save for retirement.
What type of retirement plan is best for me?
Several retirement plans are available, including 401(k) plans, traditional and Roth IRAs, Simple IRAs, and pension plans. Each type of plan has its own set of rules, benefits, and drawbacks, so it is important to consider which plan best suits your needs.
How much risk am I comfortable with?
Investing for retirement involves some level of risk, as the value of your investments may fluctuate over time. You will need to consider your risk tolerance and choose investments that align with your comfort level.
How will my retirement plan affect my taxes?
Some retirement plans, such as traditional IRAs and 401(k) plans, offer tax advantages that can potentially lower your tax bracket. In contrast, others, such as Roth IRAs, do not offer upfront tax deductions but may offer tax-free growth and withdrawals in retirement. You will need to consider how your retirement plan will affect your current and future taxes.
How much should a dentist save for retirement?
Individuals generally should save a substantial portion of their retirement income from maintaining their living standards in their later years. However, the amount a dentist should save for retirement will depend on various factors, including age, income, expenses, and retirement goals. If you haven’t saved, at age 50, you will be eligible for catchup contributions.
What are the benefits of a dentist’s retirement plan?
There are several benefits of having a retirement plan as a dentist; here a few to consider.
Most retirement plans, such as 401(k)s and traditional IRAs, allow you to contribute pre-tax dollars to the account, which can reduce your taxable income in the current year. This can help you save money on taxes in the short term and potentially in the long term.
Most retirement plans offer investment options, such as mutual funds and exchange-traded funds (ETFs), that can help your money grow over time. This can help you accumulate more wealth for retirement.
A retirement plan can help you save consistently, even when you may not feel like it. Most plans have automatic contribution features that help you avoid procrastination and stay on track to meet your long-term savings goals.
If you participate in a 401(k), defined contribution plan, or a profit-sharing plan through your employer, they may offer to match a portion of your contributions, which can significantly boost your savings over time.
Many plans offer a wide range of investment options and other features that can be tailored to meet your specific needs.
Many plans offer professional management options. This can be especially beneficial for dentists who may not have the time or expertise to manage their cash balance plan or set up accurate deferrals.
Some plans, such as defined benefit plans, can provide a guaranteed income stream in retirement. This can help ensure that you have enough money to cover your expenses during your retirement years.
It’s important to remember that these benefits may vary depending on the type of plan you choose and the specific terms of the plan. Therefore, it is a good idea to consult with a financial advisor before deciding which plan best fits you.
What is the best retirement plan for a dentist?
As a dentist, you have several retirement plan options to help you save for your future. The best plan for you will depend on your situation, including your income level and the amount you’re looking to save for retirement. Some of the most common retirement plan options for dentists include:
These employer-sponsored plans allow you to set aside pre-tax dollars from your income for retirement. Some employers may even match a portion of your contributions, which can help you save more money over time.
Solo 401(k) plans
Suppose you are self-employed or own a small business. In that case, you may consider a solo 401(k) plan, a type of individual 401(k) designed for self-employed individuals and dental practice owners without any employees.
SEP-IRA is another option for self-employed or small business owners; it is a type of individual retirement account that allows employer contributions. It is relatively easy to set up and administer but has lower contribution limits than other plans.
Dentists also can open a traditional IRA, which allows them to contribute pre-tax dollars to the account. However, contributions to traditional IRAs will be capped depending on your income and age.
This type of IRA allows you to contribute after-tax dollars to the account, and the contributions grow tax-free, and you can withdraw the money tax-free in retirement. However, there are limits on contributions based on income level.
Defined benefit plan
This type of plan is more suited for higher-income dentists, it allows you to put in a significant amount of money tax-deferred way, and the plan calculates an annuity payment for you in retirement.
It’s a good idea to consult with a financial advisor before deciding which plan best fits you. They can help you evaluate the pros and cons of each plan and can help you find one that aligns with your goals and financial situation.
Can refinancing your student loans help your retirement strategy?
Refinancing your student loans can potentially help your retirement strategy in several ways.
First, by refinancing your student loans at a lower interest rate, you may be able to lower your monthly loan payments. This can free up some cash flow to save and invest for retirement. Additionally, if you can refinance your loans at a lower interest rate, you may be able to pay off your loans more quickly, which can also help you save money over the long term.
Second, if you’re having trouble making your loan payments, refinancing can help you restructure your loan to make your payments more manageable. This can help you avoid falling behind on your loans, which can negatively impact your credit score and your ability to save and invest for retirement.
It is important to consider that refinancing federal student loans may cause you to lose the benefits and protections that come with them (like income-driven repayment plans or loan forgiveness), so you want to make sure that you fully understand the terms of your new loan before you refinance.
Refinancing your student loans can be a smart financial move that can help you save money and improve your long-term financial outlook. However, it’s important to carefully consider your options and work with a qualified financial professional to determine if refinancing is right for you.