The Gold Crown Podcast

How Dentists Can Retire Before 50 – A Guest Article From a Dentist Just 1 Year Away From FIRE

I always love receiving messages from dentists on the path to FIRE, so imagine my delight when a dentist, who is just 1 year away from FIRE, freely offered write an article on his insights that have led him to the end of his journey. Due to him having not yet announced his plans, he has decided to remain anonymous and we hope to have him on the podcast soon once he has made his FIRE plan public. Enjoy!

How Dentists Can Retire Before 50

Have you heard about the FIRE movement? If you have found this website I’m guessing you have, and nowadays it’s easy to find financial blogs that describe retiring before a traditionally accepted age with the ability to maintain one’s lifestyle without the need to ever actively earn another dollar. This is the definition of Financial Independence Retire Early in a nutshell. But I’m guessing you are also a dentist and many threads on Dentaltown will tell you that as a dentist you have no shot (weak pun) at retiring early. In fact, the ADA reports that the average retirement age for a dentist is approximately 69 years old while the average retirement age for an American is only 63 years old.

Why can’t dentists retire early? Because most dentists graduate with a large student loan. Then we inflate our lifestyle and live like doctors. Then we purchase practices and go into more debt. And dentistry isn’t as profitable as it used to be. The golden age of dentistry is over and dentists are losing the war to insurance companies and corporate dentistry. You can probably come up with a few more reasons why you will likely die with a handpiece in your hand.

I believe that dentists can still retire at a young age. I’m 42 years old. My wife and I are on pace to reach financial independence next year. I want to share how we are doing it because there is nothing special about what we are doing. I’m not a day trader, real estate mogul, lottery winner, and we never received an inheritance. I am a clinically average dentist who owns a dental practice (just one office). If you are a dentist that would like to retire before age 50, you can do it. Here is how. You will need to become financially literate, track your numbers, learn to hate debt (stay with me), work hard and ambitiously (the offense), live below your income (the defense), and have a strong internal locus of control.

BECOME FINANCIALLY LITERATE

First, I have a disclaimer. There isn’t an original thought in this entire article. Everything I’m about to discuss I learned from other resources as I became financially literate, and later as I studied personal finance and investing. I will attempt to give credit each time I discuss a concept I learned elsewhere. As a starter, this whole article isn’t original. In 2008, I read an article in Dental Economics by Dr. Doug Carlsen describing characteristics of dentists who retired before age fifty. Google it. The article is still applicable today.

Second, it is very unfortunate that personal finance isn’t better taught in school. For many people, even discussing money is taboo and many families don’t talk about money. But keeping and growing your savings is at least as important as making money in the first place. Today, there are great resources to help dentists learn about personal finance and investing. When I graduated from dental school, I recorded Suze Orman and got a subscription to Money Magazine. Nowadays, I would direct a new grad over to whitecoatinvestor.com. On the website, Dr. Jim Dahle covers everything a doctor needs to know about investing. It is possible to become financially independent by stuffing money under your mattress, but it is much more efficient to learn how to make your money grow. A dentist can invest in stocks, bonds, and/or real estate. Compound interest is amazing and necessary if you want to FIRE. The website also educates its readers about different types of insurance, and even tips about how to increase income and control spending. Also, as a dentist we are targets for people trying to sell us poor investments (investments that benefit the salesperson significantly more than the investor). He teaches his readers how to identify and avoid these situations. I really feel that WCI is the best financial resource available to dentists and spending an hour or so a week reading his blogs and/ or listening to his podcast and/ or taking his course and/ or reading his book is time well spent.

TRACK YOUR NUMBERS

This one is really important to me. First, you should be tracking your annual spending. My wife and I track this down to the cent. This is easy for us because we each have one credit card. We also have one checking account that we use to pay all of our bills. You don’t have to simplify to this extent, but this makes it really easy to track spending. Second, you should track your income. Subtracting spending from income lets you know how much money you have available to pay off debt, save, or invest. The most important number to track is savings rate. Your annual savings is everything that you invest, save, or use to pay off debt throughout the year. Your savings rate is everything you save throughout the year divided by your annual net income (income after taxes). If you would like to retire before age 50, I would encourage you to have at least a 50% savings rate.

If you choose to buy a dental practice, there are many more numbers that you should be tracking. A dental specific CPA or practice consultant can help if you don’t want to do this on your own, but you need to know these numbers. I track new patients per month, gross production, net production (after write offs), overhead, net collections and cash flow. Knowing these numbers allows you to gauge your financial health (and if applicable the health of your practice) and make decisions to improve these numbers.

LEARN TO HATE DEBT

I’m not Dave Ramsey. I do believe in good debt. Good debt is debt that will allow you to improve your financial situation. For example, taking on student loan debt to become a dentist allows us to have a much higher income than we would have otherwise had. I don’t know what I would have done with my BS in biology, but I know I wouldn’t be in the financial position I’m in today if I didn’t take on that debt. If you choose to buy a practice and possibly the commercial real estate in which you practice, this could be another example of good debt. Is taking on a mortgage to buy a house good debt? Real estate brokers, banks, and the government certainly wants you to believe it is, but we can leave that debate for another time. There is definitely bad debt. The classic example of bad debt is credit card debt. The interest rate is always high. Another example is pay day loans. Even financing a car is bad debt. If you find yourself with bad debt pay it off quickly. Then analyze and fix what caused you to take on that debt in the first place.

Good debt can become bad debt if the good debt is overleveraged. For example, White Coat Investor recommends trying to maintain student loan debt at a 1:1 ratio. This means that a student would project their income for the first year after they graduate and try to maintain their student loan debt to no higher than that number. According to the American Dental Education Association, the average student loan debt for dentists graduating in 2019 was $292,169. So, young dentists are frequently finding themselves with ratios much higher than 1:1. At what point would taking on this level of debt fail to make financial sense? If a young dentist feels that they aren’t able to pay off their student loan debt within five years of graduation, I would encourage them to contact Travis Hornsby at studentloanplanner.com.

I took on student loans, a practice loan, and a mortgage to purchase the commercial real estate. I would do it again, but I always hated the debt and paid it off fairly quickly. But what should you do first? Should you pay off debt, invest for retirement, or invest back into your practice. My answer is yes, you should do all three from the beginning. The key to this is maximize offense and play strong defense. Our income increased throughout our career, but I always felt that as long as we had debt we were still poor. As a dentist you should be able to become completely debt free and become FI before age 50.

THE OFFENSE

My thoughts on offense, defense, and locus of control are all derived from the book “The Millionaire Next Door.” This is a classic book (written in the 90s) that analyzes characteristics of the average millionaire in the U.S. It has since been updated and “The Next Millionaire Next Door” was released in 2018. The Cliffs Notes version is that millionaires work hard and ambitiously while spending significantly less than what they make. As an aside, the book proves that The American Dream is still alive and well. The first version of the book found that 80% of all millionaires were born to middle class or below families. The latest version found that the number is now closer to 86%. My wife and I both grew up in lower middle income families. So, don’t let anyone tell you that The American Dream is dead.

Offense means that you maximize your income with hard and ambitious work. As a dentist, the best way to maximize income is typically through practice ownership. The ADA reported that the average private practice dentist made $204,710 in 2019. I would suspect that the average practice owner make significantly more than this. But owning and running a small business is hard work. I heard the hosts of the “Shared Practices” podcast mention that the worst day as an owner is worse than the worst day as an associate, but the best day as an owner is way better than the best day as any associate. I completely agree. Even if a dentist chooses to never own, or even chooses a career in public health, the military, or academia their income will likely be over six figures. This is a high income and FIRE can be achieved from any dental career path, but practice ownership is likely the surest path to early retirement.

THE DEFENSE

Defense means your annual (personal) spending. There is no correlation between spending and income. If a dentist wants to achieve FIRE it will likely mean that they can’t have a lifestyle that others expect a dentist to live. I listen to a podcast by a popular financial advisor firm that caters to dentists. A few months ago, they mentioned that their average client spends $214,000 per year. These are clients that they are advising. I assume that their client’s average income is also higher than the ADA average, but I would guess that their clients’ average savings rate is also well below 50%. Meanwhile, according to the Bureau of Labor and Statistics the average American family spent $63,006 in 2019.

There is nothing wrong with spending $214,000 per year. In fact, I would argue that the purpose of money is to help us live our ideal life and you should strive to have great work-life balance from the beginning. My wife and I buy everything that we want, but we are intentional with our spending. We think about major purchases and whether or not that purchase will really make our lives better. If the answer is yes, we will absolutely buy it. But if the answer is no, and we impulse purchase something, we regret it. You will be surprised to learn how little you can spend and still live a great life after all debt is gone.

INTERNAL LOCUS OF CONTROL

Successful people believe that they control every aspect of their life. They don’t believe that life just happens. For example, I don’t allow myself to believe in luck. Of course, life throws obstacles at us that complicates our lives. But I know that I will overcome every obstacle and reach every goal that I set for myself. If you want to achieve FIRE, you have to know that you can do it, and then make it happen.

So, there you go. This is the dental blueprint for FIRE. What do you think? Did I leave anything out? Is there anything that you disagree with? If you would like me to dive deeper into any of the topics leave a comment or reach out to [email protected].

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You CAN Retire Sooner than Expected

Many critics of FIRE have a hard time realizing that they CAN retire much sooner than they think; they are just making the conscious decision to NOT to. The key is savings rate. I’m going to say it again to fully emphasize: THE KEY IS TO RETIRING EARLY IS TO HAVE A STRONG SAVINGS RATE. Many salespeople try to tout higher and higher returns on investment, but the reality is that ROI IS NOT NEARLY AS IMPORTANT AS SAVINGS RATE. Networthify (see link below – they did not pay me to say this) has a great calculator that will tell you how many years at what savings rate will allow you to retire:

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https://networthify.com/calculator/earlyretirement?income=50000&initialBalance=0&expenses=20000&annualPct=5&withdrawalRate=4

I plugged in the average annual income of employed dentists according the Bureau of Labor and Statistics in the US ($178,260 ignoring tax) and just clicked the graph to see how many years to retire it would take at a 60% savings rate. The result is that the average dentist could retire in 12.4 years even if they started with $0 assuming a 5% ROI, and a 4% withdrawal rate (a whole other article is needed to explain why 4% withdrawal rate is generally considered a “safe” withdrawal rate. Basically, the Trinity Study in 1988 states that if you withdraw 4% from your retirement, you should never run out of money even during the worst recessions in history. To be fair, Nobel Prize economist William Sharpe says running out of money in retirement is a tough problem, and one better alternative could be having “lock-boxes” of diverse assets each year to sell rather than a fixed percent withdrawal).

Most folks focus on Return on Investment (ROI) saying higher is better. Now ROI is important, but even a spectacular 20% ROI on every investment at the US average of 6% savings rate takes 24 years to retire. On the other hand, a 2% ROI with a strong 60% savings rate would allow a retirement in 14.5 years! Side note: I do not recommend trying to get a 2% ROI because inflation is normally about 2-3%, so you wouldn’t be making any return. A healthy savings rate is like fuel in your vehicle. Without any savings to invest (fuel), it doesn’t matter if you have a high ROI (Lamborghini) or a low ROI (beater) – you’ll go nowhere fast.

*credit to the ADA

Most people tend to save 6% (US average) and aim for a 7% ROI with the stock market, which would take a whopping 49.5 years to hit retirement (dentist or not). 49.5 years!!! Sadly this is how most people do retirement, but hopefully you won’t be one of them. Life is too short to have to spend that much time working especially when a small increase of savings rate earlier in your life can exponentially accelerate your retirement timeline and provide the freedom to spend your precious time the way you want. Even if one wants to die with a drill in their hand, FIRE doesn’t prevent that, it just gives the joy of working because they want to, not because they have to. Keep in mind the average retirement age of a dentist according to the ADA is now 70 (back in 2017, it was 68.9), and it will continue to increase. Most of us get out of dental school around age 27 – that’s over 43 years of working.

*credit to the ADA Health and Policy Institute

I personally have a savings rate of about 50% right now, but hope to improve it more in the future (If you have a savings rate that is higher, please reach out to us at [email protected] – we’d love to share your wisdom & help more people on their path to FIRE!) I don’t feel deprived of anything at this savings rate, and I think most dentists would feel the same way. The Zig Zigler quote rings very true here: “you can have anything you want, but you can’t have everything you want.” While buying a boat or a corvette might not be “FIRE friendly,” your life is your own and if that’s important to you, make it happen. If it’s important you’ll find a way to work it into the budget. Just keep in mind that the longer the list of exceptions, the less successful FIRE will be. Many graduates feel “I got through dental school and I deserve to buy something nice” (I know this because I felt the same way), but it’s important to try to live like a dental student even after graduating.

25X Rule – the rough estimation of the total money needed to retire early. I spend about $6K a month, which is $72,000 per year. $72,000 x 25 = $1.8M. Most Americans need more than $1M to retire (per Charles Schwab) so this sounds believable.

A misconception most people have is that if you make a lot of money (like people think dentists do), then you are wealthy. Most dentists tend to spend up to their income (ex: if you take home $200K but spend $195K you’re actually relatively poor), so it doesn’t matter the total amount of money someone makes, it’s all about their savings rate. For those feeling they want to be very aggressive with their FIRE, there are lean FIRE communities on reddit and Mister Money Mustache that advocate this approach (and they are not dentists and did not have dentist income but they still make FIRE happen!). Other great resources for FI include Active Duty Passive Income, From Military to Millionaire, Physician on FIRE, Fire Drill Podcast, Mad FIentist etc.

Final Tips:

  1. Track everything through mint or other financial software.
  2. Pay yourself first – do NOT just “save what’s left over.” Sounds challenging, but this is doable!
  3. Raise your savings rate – try to shoot for 50% or higher. Savings rate will ALWAYS be the most important factor in FIRE.
  4. 25x Rule: Times your annual expenses by 25, and once you have hit that FIRE number, you are Financially Independent.
  5. Once retired, 4% withdrawal rate or less for safety for your eternal nest egg.