THE EDITOR'S CORNER

I was struck the other day, in reading an article on retirement for professionals, to observe that the charts which were supposed to serve as a guide to the amount of money that would be required to supply various levels of retirement income at various times in the future took no account of inflation. I was also struck by the relatively small amounts that dentists have put aside on the average toward their retirement. With a small percentage of exceptions at the top, these amounts were totally inadequate to the purpose.

If a person were to begin today to put aside money in a retirement fund with the expectation that he would retire in twenty years with an income of $40,000 - $50,000 before taxes, it would be necessary to accumulate a retirement fund in excess of a million dollars, if he wanted that $40,000 $50,000 to be not just dollars, but purchasing power in 1977dollars. In other words, if he wanted to continue to maintain the standard of living that $40,000 - $50,000 provides in 1977. The reason that the fund must be so large is, of course, inflation. Even if inflation is estimated to be only 5-6% on the average for the next twenty years, the fund will have to exceed a million dollars to generate the desired retirement income.

We have all stood in such traditional awe of millionaires, that it seems to be an impossible goal to think of becoming one yourself. Yet, that is the requirement; and it is an achievable goal, which a substantial number of orthodontists can reach without great risk and without sophisticated investment acumen.

The present income tax law permits professionals who are incorporated to set aside pretax dollars in a retirement fund and to accumulate yield which is also untaxed until it is withdrawn from the fund. This creates a retirement plan pyramid in which one can maximize the accumulation of money.

Do yourself a favor. Take a pencil and paper and perform two simple arithmetic problems 20 times each in the following manner. Take Orthodontist A and Orthodontist B, each with $20,000 to invest annually. Let's omit the adjustment for inflation for the moment. Let's say that they each invest in a good quality 9% corporate bond. Orthodontist A does not have a professional corporation and his $20,000 and the yield from his investment is taxed each year. A model of his investment would look like this:

Orthodontist B has a professional corporation and a model of his investment would look like this:

Now continue these two investment models, performing the simple arithmetic for 20 years of investment. For Orthodontist A, add $10,000 each year to the balance from the previous year and add half the 9% yield for that year. Do this nineteen additional times. For Orthodontist B, add $20,000 each year and all of the 9% yield for that year. Do that nineteen additional times.

If your arithmetic agrees with mine, Orthodontist A winds up with a fund of about $325,000 after 20 years and Orthodontist B winds up with a fund of over a million dollars. If each were to try to live on the yield from that fund at 9% a year from that same 9% corporate bond, now they both will be paying taxes on the yield, but Orthodontist B has accumulated the fund that permits him to live at the standard of living he desires.

Since Orthodontist B would realize a yield in his fund larger than he would require for his annual income goal, some of that yield can remain in the fund and it would be unlikely that he would have to touch his capital for years to come. Orthodontist A, on the other hand would have to use up some of his capital every year to achieve a satisfactory standard of living and would be in serious danger of outliving his money.

Some orthodontists may not be able to set aside enough each year to reach the optimum goal. Others may be unwilling to sacrifice present life style for future security, which is not guaranteed. Others may feel that they have too many employees to cover to make the plan feasible for them. I respect all of these positions. Yet, each of us should not reject this opportunity without actually figuring it out for his own situation. If more than a 9% yield would be needed and a less conservative approach is required, one has a better chance of success in that route in the tax-sheltered corporate retirement plan than outside of it. If you act fast enough, you may still be able to make the plan retroactive to 1977 and gain a year on the pyramid. Think of the pleasure of being on top of this huge pyramid, rather than under it.