In my last blog post, I discussed the many benefits of qualified retirement plans. As great as they are, however, sometimes these plans are not the proper economic fit. In one example, let’s talk about a doctor who is much younger than the staff. And perhaps there is an especially large staff. My rule of thumb is that if the doctor can keep 78% or more of the total contribution, then that is a favorable situation. But in the situation I am describing, the doctor may only be ale to keep 40 to 50% of every dollar contributed.

Another example might be a doctor earning enough money to contribute more than the 401(k) maximum. And a defined benefit plan coordinated with the 401(k) would allow him/her to do this. But again – with an unfavorable census – with some staff members as old or almost as old as the doctor- the costs to do this are prohibitive.

Welcome to the world of a properly designed whole life insurance policy that can serve as an amazing wealth accumulation vehicle. And if you own your business as most dentists do, there is no requirement for other employees to participate in the plan. So the entire dollar amount that you want to set aside for retirement goes only to you! There are numerous benefits to using whole life as a retirement strategy.

• There is guaranteed protection of your principal. The cash value accumulating in the plan is not subject to the fluctuations of the stock market.

• There is a guaranteed rate of return. Usually with a top line insurance company, that rate of return is in the area of 4 to 5%.

• The money in the plan accumulates tax-deferred. The concept is similar to a Roth IRA. When you put the money in, it is with after-tax dollars – so there is no sheltering effect as when you contribute to a qualified plan. But when you take the money out, it is tax-free!

• There are no age restrictions or limitations as to when you can withdraw the money. With pension plans, there may be penalties if you withdraw before age 59 1/2. Also, you must take required minimum distributions from your pension plan starting at age 70 1/2. Of course, those distributions are taxed at whatever the ordinary income tax rate is at the time of the withdrawal.

• You can also borrow from the cash value of the whole life policy – at any age and at any time – without having to pay a tax or a penalty. This is a big benefit compared to the many restrictions you would encounter if you borrow from a qualified plan.

• Of course, the death benefit of the whole life policy is guaranteed for the rest of your life. That death benefit is tax-free to your beneficiaries.

• With these newer well-designed whole life policies, there are also riders included for disability and long-term health care. These are almost too good to be true.

I would certainly encourage you to consult an expert on the many advantages of acquiring a whole life insurance policy. Randy Fine of Robert Fine & Associates is as good as it gets. Randy is extremely knowledgeable and creative with years of experience working with dentists and other high net worth individuals. He has helped many of my clients and I feel totally comfortable recommending him. You can reach Randy at 508-889-6329.

I have always been of the belief that if early on – probably by age 30 – you start “saving your age in thousands” in a qualified retirement plan – e.g. 31K at age 31, 32K at age 32, etc. – and you continued to do that for the next 35 years – you would accumulate enough money to comfortably retire at age 65. That amount would easily be in the three and half  to $4 million range – even with conservative return expectations of 5%.

Financial Analysis of Retirement Saving

You could then continue to maintain your current lifestyle and work because you want to and not because you have to. I’m speaking from my own personal experience and my observations of successful clients over these many years.

In my opinion, qualified (approved by the US tax code) retirement plans are like the eighth wonder of the world! The amount of the contribution you make to the plan shelters your taxable income for State and Federal. So if your W-2 income was 250K and you made a contribution of 40K, your reported taxable income would be 210K. The money contributed to the plan grows and compounds tax-deferred until the money is withdrawn. You pay ordinary income tax on the amount of the withdrawal when it is made. Contributions that you make for staff are fully tax deductible as a business expense.

If you are lucky enough to have started down this path an early age, you are to be congratulated. Just continue to stay the course. But many doctors were not that fortunate. Maybe they were uninformed – or didn’t have the discipline to save – or simply didn’t have the money available. Now they are age 45 or 50 – finally have more disposable income – and are recognizing they are seriously behind the curve on retirement planning. How do you catch up?

There are two types of qualified plans: defined contribution or defined-benefit. 401(k) plans seem to be the most popular and they are a type of defined contribution plan where employers can match their employees’ contribution up to a certain percentage and also make additional contributions under a profit-sharing feature. For 2016, the maximum allowable employer/employee contribution limit is 53K or 59K for those over age 50.

A defined benefit plan is a cash balance pension plan under which an employer credits a participant’s account with a set percentage of his or her yearly compensation. This can be paired with a 401(k). It often is a fabulous strategy for older doctors much closer to retirement age than their employees. With a favorable census, you have the opportunity to annually put away 100K or more. The plan by law must stay in place for at least three years. When the doctor retires, the plan can be terminated, and the monies that have accumulated for the doctor and for the staff can be moved into an IRA.

The rules and limits on retirement plans change frequently. You need a true expert in this field to advise you. And I would choose this person separate and apart from a financial advisor who would be making investment choices.

According to recent statistical data,  if either you or your spouse live to age 65, at least one of you will live to age 90! And just in case you forgot, it takes a lot of money to live well. So do yourself a favor and at least get informed. I highly recommend Seth Larner at Compass Retirement Consulting Group. You can call Seth at 603-661-9330.

It is a privilege to work, and don’t let anyone tell you differently. But the best scenario – especially when you are older and getting closer to the end of a clinical career – is to work because you want to work and not because you have to work.

One of the major reasons that we remain in a “seller’s” market for dental practice transitions is that there are fewer practices for sale than the number of doctors looking to buy. Many doctors who were planning to retire at 65 have come to the realization that they can’t afford to sell and still maintain their current lifestyle. For the first 11 years of the 21st century, the stock market was a bitter disappointment with essentially no growth. And many doctors, understandably nervous when the market crashed and lost so much value in 2008 and 2009, sold to protect their portfolio but unfortunately never bought back in as the market totally recovered.

So age 75 or 72 has become the new 65. Doctors continue to have to work longer than they ever thought they would. For whatever reason – bad advice, bad execution, lack of understanding – these professionals never anticipated how much money they would need in retirement. Life expectancies continue to lengthen. Statistically, if both you and your spouse make it to age 65, one of you will live to 90! And living longer obviously requires lots of cash. So how do you prepare yourself for this challenge? How do you make the supposedly golden years truly golden?

Over the next few months, I plan to write a series of blog posts all about ways to aggressively save money. So many of the rules have changed, and more products than ever before are available to the motivated and informed doctor of any age. Stay tuned. As always, I will look forward to your comments.