Seven things NOT to do when you are in debt

By Steven E. Leininger, CPA/PFS

You know who they are; maybe you are one of them. They are the dentists with the nicest offices and the latest gadgets, the expensive lake homes, the fast cars, and kids in the best schools. On the outside, these people are shining examples of success. But too often, meet those same doctors behind closed doors and you learn the truth — they are a financial train wreck waiting to happen. And they’re scared! They have too few savings, too much debt, and too little time to change course.

An example might be a dentist in his mid-50s, so busy leading the good life that he has given little energy to “life after dentistry.” Worse is the doctor in his 60s who finally realizes he can’t keep up this pace forever. Whether it’s a result of past mistakes, lack of planning, poor advice, or random misfortune, when the crisis has been building for years, things cannot be fixed overnight.

That said; it’s better late than never. A common sense, experienced dose of reality can breathe new hope into a seemingly impossible situation. So here’s some well-intended tough love in the form of seven things NOT to do in financial catch-up mode. Starting on the path toward peace of mind is often the hardest part. Here goes.

1. Don’t sugar coat your plight. If you have read this far, you’re probably a good candidate for catch-up mode. Rationalizations won’t work any longer. I hear catch-up candidates trying to assure themselves by saying, “It will be alright.” But I usually hear a nervous question mark at the end. After decades of poor planning, risky investments, and lavish living, it’s time to take a complete inventory of where you are, without fabricating values for those lousy partnership investments or other fairy tales. It’s time to get real and be honest. Your loved ones are depending on you.

2. Don’t wait for a miracle. Only consistent, disciplined saving will help. There is no such thing as a magic investment that will resolve the crisis while you sleep. You probably got to where you are today because of a misguided “sure bet” investment, or a series of them over the years. Savings only comes from two sources — reduced spending (especially on the personal side), and increased income. (Crank up that practice!) Example: For the past decade, Bill and his family have taken an annual three-week European vacation. The tradition became an annual highlight and bonding experience for them, but it also cost $25,000 each time, which demanded $42,000 net from his practice, requiring his annual income to exceed $100,000. See where this is going? First order of business: Take a $5,000 vacation at a local venue. Then take the remaining $20,000 (which is really $33,000 pre-tax) and contribute it to a retirement plan. Cut your vacation short by a week and work in the office, making an extra $10,000 net. Contribute that to the retirement plan too. With this simple adjustment, we “found” $43,000 to fund Bill’s retirement. But Bill did even more. He hired a dental consultant and increased his net income by $60,000 per year with less effort. He took this newfound money and started a personal investment account along with paying down his mortgage.

3. Don’t underestimate the power of tax-deferred savings. Most of us know the magic of compound interest, in which accumulated interest has a snowball effect on your savings. The bigger story is compound interest in a tax-deferred environment. Example: $150,000 of annual retirement plan savings earning 6% for 10 years grows to nearly $2 million, generating over $85,000 per year in after-tax income. If we first had to pay taxes on the money, and then pay taxes along the way, we would likely have only about $1.1 million with only $45,000 in after-tax income. How can you save for an annual contribution of $150,000? It takes careful attention to plan design, but today’s opportunities make it easier. For example, as one way to jump-start your catch-up mode, new plan designs (cash balance, defined benefit, and others) allow for accelerated, pre-tax funding in the later years of your practice.

4. Don’t be rigid about the timing of your retirement. Many doctors think they should sell their practice at its peak production to obtain the best value. Forget that. It’s better to think of your practice as primarily an income generator, not a growth asset. A staged or phased buy-out may make sense. Or just keep working as always, even if the numbers drop a bit. Example: Kim postponed selling her practice by just two years, and dramatically changed her odds of success (i.e., not running out of money before she dies) from 60% to 85%. This occurred because she had two more years of savings, and two fewer years of robbing the cookie jar. It worked well for Kim that she extended the arrangement for another two years, taking her success rate to well over 90%. She not only enjoyed the financial independence she had long sought, but it gave her a tremendous sense of peace. Plus, playing golf every day isn’t what it’s cracked up to be. Serving your patients and making a difference in their lives is a thrill most dentists miss after retirement. Don’t cut it short.

5. Don’t accrue additional debt. Cut up the personal credit cards. (Really!) Pay down or pay off your HELOC and your personal mortgage. The less debt, the less income you need in retirement.

6. Don’t keep any sacred cows. Example: Joe had a vacation house in the mountains and a vintage car in the garage. “The timing is bad to sell the lake house,” he reasoned. “When it goes back up, then I’ll sell.” Here are the problems with that logic. First, we have no way of knowing if prices will recover. Most economists think real estate will continue to drop, especially for vacation homes. Second, it’s costing $2,500 a month for upkeep and taxes. Dump it! As far as the car is concerned, very few people make money on vintage cars. If it’s an unaffordable luxury, it’s time to let it go. There are more modestly priced hobbies.

7. Don’t do this alone. All top athletes, famous actors, and star executives have personal coaches to help them face their biggest challenges and maximize their best attributes. Establish a relationship with an advisor whose only compensation (and thus loyalty) comes from you. No commissions or kickbacks, period. Fees should be transparent, and your advisor must adhere to the highest fiduciary standard, which means he or she must place your best interests first. This isn’t a dress rehearsal. Find a wealth manager who is a dental specialist. There isn’t time to educate someone about your industry. Your advisor must coordinate the other necessary experts — legal, tax, practice management, and insurance.

There are many more do’s and don’ts, but this is a good beginning. If you have been consistently saving from your early practice days and all is well, congratulations! If not, there is hope. Get your expert team on board and map out a workable, practical plan. Then enjoy the ride. The view from the other side is worth the sacrifice!

Steven Leininger, CPA/PFS, is a partner with Thomas Wirig Doll, a full service tax, retirement, and wealth management firm in the San Francisco Bay Area. His firm specializes in helping dentists make smart decisions about their money. You can contact him at (877) 939-2500 or [email protected].