By Taylor Richardson, CRPS®, AIF, Financial Advisor
Dentists are high income earners, but almost 50% end up delaying retirement. Why? Net worth plays a major role in determining when dentists can retire – but dentists may not be giving net their worth the attention it deserves.
Earning a high income isn’t the same as having a high net worth. I like to point this out to dentists since they are high earners, and making good money can lull you into complacency about your actual net worth. As a result, dentists might not focus on growing it.
What Happens When You Don’t Pay Attention to Net Worth
Not growing your net worth has real consequences. Consider the fact that dentists earn on average three times more than the average American, but the average retirement age for dentists is 69, while the average American retires at age 62. The reason so many dentists delay retirement, despite earning so much more than their fellow Americans, can be traced back to net worth, or lack of it.
Net Worth is Your Financial Score Card
Think of net worth as a score card that tracks the results of your financial decisions. Every decision has the potential to either increase or decrease your net worth. Monitoring your net worth, or tracking the score card, is how you know if you’re making good choices. If your net worth goes up – you’re doing fine. If your net worth goes down – it’s time to change course.
How to Calculate Net Worth
The basic formula for establishing net worth is pretty straight forward:
Your Assets – Your Liabilities = Your Net Worth
Here’s a list of potential assets:
- Cash
- Real Estate
- Investments
- Retirement Savings
- Practice Value
Here’s a list of typical liabilities:
- Student loans
- Mortgages for home, building
- Balance owed for dental practice
- Balance owed for equipment
To meet your retirement goals, you need to know what your net worth is and check it on a regular basis. You also need to track how much your net worth rises or falls over time, so you know if and when you need to adjust your plan.
Common Mistake – Overvaluing Your Practice
In calculating net worth, many dentists are overly optimistic about the value of their practice. Practice valuation isn’t easy, so we recommend you consult a professional to determine the value of yours, but for the purposes of tracking net worth, it’s better to low ball your estimate. If your practice ends up being worth more, that’s bonus money to you, but if you get less for your practice than expected, you don’t want to suddenly be facing a financial hole in your retirement plans.
Some Liabilities Make Sense
Monitoring your net worth doesn’t mean it always has to go up. Sometimes taking on short-term liability can lead to greater gains down the road. For instance, if you assume more debt to buy equipment that allows you to expand your services and increase productivity, your net worth may go down one year, but increase at a faster rate after that.
Financial Decisions Are Complicated
Dentists are smart, but being smart doesn’t automatically make you an expert on finances. More than most professions, dentists have to deal with major financial decisions that can be extremely complex. Dental practice owners must successfully manage major debt, maintain a healthy cash flow, navigate complex tax codes, and invest for retirement. To make good decisions that will increase your net worth, you should get expert, professional guidance.
When you earn a good income, it’s easy to assume you’ll be able to retire securely, but building the net worth you need to retire won’t happen by accident. If you have questions about how to calculate and increase your net worth, schedule a call with our team at Engage Wealth Advisors. Our experienced financial advisors understand how the dental industry works and can help you grow your personal net worth and protect it for a successful and secure retirement.