The Consumer Price Index (CPI) is a measure of the average change over time in the prices paid by urban consumers for a market basket of consumer goods and services.

Comments by the Fed – FMOC: Suggest the Fed is trying to gently convince their adoring public that inflation may actually turn out to be “a little stronger than they forecast for a little longer than they forecast.”

Grant Williams’ notes in Things That Make You Go Hmmm:

We may be facing demand-driven inflation as a consequence of misguided monetary policy and misdirected fiscal stimulus. Monetary stimulus had some effect, of course, and the latest growth forecasts suggest, it is already dissipating. The Fed has done so much, so fast, it produced a self-limiting recovery in which supply – chain inflation (caused by all the container ships anchored / waiting in Los Angeles / Long Beach) tend to cap potential growth. The trucking industry may also be a part of the log-jam, backing up deliveries.

5.9% Announcement by Social Security

That is the increase that retirees receiving Social Security will pick up next year to account for inflation. It is the biggest jump in 39 years and captures what consumers have been feeling acutely over the past year: Stuff is getting more expensive.

The fact that Social Security payouts will reflect higher costs is certainly a plus for that portion of retirees’ income streams. Inflation may prove fleeting, a short-term blip resulting from pent-up pandemic demand and snarled supply chains, or it could persist. Or, it could be that the medical premium portion of Social Security could be increased and consume much of the 5.9% announced increase. No one has said much yet, other than the increase of 5.9%.

Dentist’s and Retirees Take Note

I believe all dentists and retirees can learn to think about inflation more individually and holistically. We can start with taking stock of our own rate of inflation, which is not a standard CPI. We can look at the details of our Personal Spending Plans (Budgets); a function of what we spend our money on and how much inflation we are seeing in those outlays. Inflation considerations also extend to our portfolio; think about our withdrawal or “burn” rate, if retired, as well as what kind of inflation protection to embed in our portfolio’s. (more on this below)

We can also look at, and think about inflation today, examine our own personal inflation rate, and safeguard against inflation’s corrosive effect on our investments and our Economic Engine. For most dentist’s, our Economic Engine is our dental practice. We can study our line items on our Profit and Loss Statements and/or our Management Income Statements (MIS), year-over-year or twelve month roll, looking for inflation creep in line items like; consumable dental supplies, laboratory costs, salary and benefits (hygiene, clinical, and administrative teams), occupancy total costs, administrative supplies and services, notice the rise in dental equipment cost (replacement costs), along with financing costs. All of the above will combine into our Personal CPI, which may well require an adjustment in our dental fees.

Calculating Our Own

As we collect our personal and practice inflation data, be willing to ask a question; what are we discovering? If looking at the FOMC CPI weightings and they look nothing like our own, when considering our increased household and practice spending, we are most likely on the right track. Our outlays for housing may diverge significantly from the CPI percentages, especially if we live in a paid-off home. We will still have costs for upkeep, insurance, and property taxes, which are also included in Housing Costs.

By doing the above exercises, we can learn to tweak inflation expectations, pro-actively while attempting to keep then in-line for each of line items, and incorporating our own experiences and discoveries. At the same time, it is important to not come away with a false sense of precision with respect to inflation. For one thing, inflation statistics can vary by section of our country, state, and even town by town. Moreover, a number that can bear paying attention, is the trend in our actual, all-in spending, which depends on a few key variables: our fixed and discretionary expenses, as well as, what is going on with inflation in each of the spending categories. Ultimately, our aggregate household and practice spending trend matters more because we exert a level of control over some of our spending, where the overall inflation rate is out of our hands.

Early Retirement

Is early retirement is on your radar? Data suggests that the case for a growing share of workers, inflation protection is an even bigger hurdle. That is because we will be using our retirement dollars, and spending them over a longer time horizon, when starting early. This increases the odds that inflation could flare up sometime during our drawdown period: pay attention to withdrawal rates, portfolio construction, and Social Security adjustments.

Investment returns over the next decade might not be so great, some experts warn. Be prepared to rein in our spending in case a lousy market materializes. A threat of experiencing big portfolio losses early on in retirement, when our portfolio value is at its highest, is one of the key threats to the durability of any retirement plan. And sequencing risk looms particularly large in environments like the current one, when bond yields are low and equity valuations are on the high side. If market returns are indeed lower than our two decade averages, in the first few years of retirement, our best defense is to cut our spending. For younger dentists reading this a lesson to be learned is “keep shoveling it in” and increase the percentage of present income earmarked for saving and investment; over time, through compounding, this will ease your worries and provide a greater measure of choice in financial decision making.

What we may want to discussed, in this context, is the other side of the same coin. Yes, today’s retirees can become more conservative on the withdrawal rate, and use a safer withdrawal rate closer to 3% than 4%. What may matter more is the dollar amount we can pull out, not the percentage. Thanks to elevated portfolio balances, a 3% withdrawal of a larger portfolio may translate into a withdrawal that is every bit as large as 4% on that same portfolio ten years ago. In addition to balances being larger, retirees can enlarge their lifetime portfolio withdrawals by employing a flexible withdrawal approach rather than taking fixed amount withdrawals; helping to reduce portfolio demands and a requirement for bonds with minuscule yields.

It is good to remember to continue to use and learn from the Financial Tools, which have always been available to us: Personal Spending Plan, Personal Net Worth Statement, Potential Cash Flow Analysis from All Cash Flow Streams (Dental Practice, Tax-Deferred Portfolio, Personal After-Tax Portfolio, Investment Real Estate, and other holdings. It is a good thing most of us have been given enough years to layer our financial learning, with intention!

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More than 31% of solo practicing dentists today are 55 years or older. Since most dentists have traditionally retired between 60 and 69, retirement is a “hot” topic.

Future Financial Need

Goal setters who have planned for retirement since the beginning have accumulated five times what a non-planner has saved. Yet, baby boomers (now mid 60’s to 70’s) have reinvented each phase of their lives, never matching what has been customary. An ADA survey indicates dentists save 10.6% of their income which is below the federal limit of 15% contributions to a qualified pension fund.

Financial advisors think you will need from 70 to 90% of your current net income in retirement. The average dental net in 2019 was nearly $200K. In retirement planning, eighty percent of that is $160K, which is $13,350 a month. If you retire at age 60 and live another thirty years, you will need $4.8M from interest and savings.

Retirement Choices for Today’s Boomers

The figures are staggering for the slightly unprepared. What are the choices for today’s boomer dentist? Sale? Partnership? Associateship? Retire as you go? Or, will you up your game plan for 5 more years? Let’s investigate.

Sale: A sale is currently worth about 24 months of net income which is then taxed. Beware. A sale is final. You are no longer a dentist in that location. There is no going back. The book is closed.

Partnership: Partnerships in retirement have their own pros and cons. By reviewing what motivated you to enter the profession, you may find independence and freedom on your list. Selling half your practice to an unknown partner means you have surrendered your freedom and half your net income in exchange for about nine months of net income. The staff will still look to you for leadership.

Associateship: Becoming an associate after thirty years of private practice could be successful if you have the qualities to be an employee. Will you be happy doing dentistry for someone else? Do you have the qualities to be a team player under someone else’s leadership and rules?

Continue Your Own Practice by Retiring as You Go: Continuing to practice beyond the average retirement age is a viable alternative. The real advantages to keeping your own practice viable are the continued net income, ability to deduct expenses such as continuing education and a leased car, and the psychological rewards of feeling needed, serving others, and your earned status in the community.

Continuing your own practice can be done on your own terms. You can design your ideal practice days, plan your continuing education around travel adventures, and attract staff to work your schedule. You may want to work three days a week for three weeks and take the fourth week off. If you can continue to work on your own terms and have a substantial income that does not require using your retirement funds until you choose, count the advantages and your blessings.

Continue Your Own Practice by Upping Your Game: Another viable choice is to “Up Your Game” and actually make an extra $2M by increasing net in a five-year plan. This can cause a $900K increase in the eventual sale price. We have a number of very pleased retired dentists who upped their game in their 60’s. They can’t believe how much more enjoyable practice is again.

Upping your game means increasing your dental skills and your treatment offerings, installing strong systems of block booking to produce more in fewer days, solid sales conversations for an increased level of patient care, and having an accountable accomplished team marching with you. Because you have upped your skills and are focused, you can actually take more time away as you increase your net. 

Which Choice Is Right for You?

Examine your financial needs. Examine why you enjoy dental practice? Examine your options and spend time thinking about which retirement option feels most comfortable to you. We can help. Many of our clients have chosen to stay part of dentistry, and we have observed that when dentists keep up with continuing education and become skilled at working with new materials and techniques, they gain more than an enhanced income stream. They feel a rebirth and rejuvenation about their profession.

On January 10th, 2020, The Wall Street Journal published an article on the changing patterns of retirement. It is worth a look. After 43 years in the world of dentistry, I have now survived three years as a “retiree” and have a few comments about preparing for and transitioning into this significant life event.  

Preparation Tips 

1. Before you “pull the plug” on work, start to figure out what you would like to do when you have more time. My unhappy retired friends generally failed to do this. I suggest you build on the things you like to do. Include personal time and together time with your spouse. Look forward to a new challenge such as learning a new language or trying your hand at gardening. If you are not now in a service club or a similar group, you will have the time to try that.  
2. With your spouse, discuss how you will manage money. Long before retirement, create your retirement budget and financial growth plan. The Pankey Institute curriculum will help you with this.  
3. Be genuinely interested in others. The happy retirees I have met talk much more about the new friends they have made than about themselves. They are outward-focused and active listeners.   

Transition Tips 

1. Create a schedule and stick to it. If you used to get up at 5:30 am and liked doing so, don’t change. Just get up and do something you did not have time to do in the past.  
2. Be committed to your plan. Intentionally stick to your financial and time management budgets.
3. Stay involved in dentistry if you love it. Keep your membership in organized dentistry and your study club. Be a mentor and continue to learn. If I am fortunate, I will help a few young dentists be more successful and avoid some of the errors I made. 
4. Meditate on L.D. Pankey’s Cross of Life. Be committed to spending social time with your family and friends, even volunteer for their causes. And don’t forget your spiritual life. I’ve been amazed at the nice folks we’ve met at church who are interested in us as people and not as what we did in our careers

Final Thoughts 

If you are 30 and have not started to think about retirement, it is time to start. The successful economics of retirement takes time and commitment. If you are nearing the years when you will retire from practice, start thinking about your future lifestyle now. Keep in mind that a life well lived is a happy one. Continue intentionally “giving back” after retirement, and you will continue to make memorable, good things happen for yourself and others.