You Will Retire
A report in the October 18, 1993, issue of the ADA News indicated that a large majority of Americans will not have half of what they will need to retire. Orthodontists can be in the same boat if they do not make plans now for an adequate retirement fund. I know that many orthodontists say they do not intend to retire. If you believe that, think again.
When life expectancy was in the 70s, it was reasonable to think that a person in good health could practice into the 70s, and shuffle off this mortal coil with wires in hand. Today, many orthodontists will remain in vigorous health in their 80s, and many may survive in poor health because modern medicine is increasingly able to keep us alive past the time when the mind or body has ceased to function efficiently. In any event, orthodontists who survive past 80, whether in relatively excellent condition or not, are unlikely to continue to practice.
If one is fortunate enough to have a long life, retirement is more of a likelihood than it may have been in the past; in fact, the longer the life, the greater the likelihood. It would not even be unreasonable that a presently practicing orthodontist might be one of the 1 million Americans who are projected to be 100 years old in 2050 and beyond. An orthodontist who retires at 65 might, therefore, have to provide a desired lifestyle for self and spouse for another 35 years. This raises the question of how to support a retirement of indefinite length.
One way to handle retirement is to avoid it as long as possible, either by continuing solo practice as long as is feasible or desirable or by phasing out of practice with an associateship or a partnership. Still, considering that one-third of the present orthodontist retirees retired involuntarily, neither of these alternatives is dependable. Another way is to retire from orthodontics, but continue active employment in an enterprise that is profitable, that will not require subsidy from accumulated retirement funds, and that can require a minimum of activity by the former orthodontist.
Considering that there are about 8,500 orthodontists in the United States and fewer than 300 orthodontic graduates a year, there are just not enough potential associates or partners. Not many orthodontists can go that route. The chances of developing a successful small business while practicing orthodontics are not great. So, while the associateship/partnership or the successful business enterprise will work for some, it seems likely that the vast majority of orthodontists will be trying to provide for retirement by setting aside an adequate sum of money to fund individual retirement needs.
The average orthodontist's peak earning years are roughly from the 10th to the 20th year in practice. Net income does reach a substantial amount by the 10th year, but young orthodontists have pressing personal expenses in their early years. Although net income tails off after 20 years in practice, the average orthodontist's family expenses are likely to have declined. Assuming that an orthodontist wished to retire at age 65, there is a window of 20 to 25 years for the accumulation of retirement funds.
If an orthodontist were to retire at age 65, he or she could contemplate the likelihood of 20 to 30 years of retirement. Let's say 25 years, and aim for a fund large enough to support a desired lifestyle from fund income without touching the principal. That would allow a margin for error. Let's also assume that the retiree would need 75% of his or her last practice net income. In 1993, the median net income was $195,000 for the age group in question. Seventy-five percent of that is $146,250. How much would it take to yield $146,250 a year?
That would depend on the size of the fund and how it is invested. It would not only be prudent, but necessary, to make risk the primary consideration. It is the only way to be sure the goal will be reached. Not much, if any, of a retirement fund on which one is depending to maintain a certain standard of living should be placed at risk. Starting with interest rates as low as they are now, one could hedge against rising interest rates and rising inflation, with a plan that has periodic return of principal for reinvestment. The recent experience of many retirees has been the reverse. They may have been comfortable at a 9-10% yield, but devastated when yields dropped to 3-4%.
At a yield of 3% (today's money-market yield) it would take $4,875,000 to yield $146,250 a year. At 5%, it would take $2,925,000. At 7% (which is still possible in a conservative investment), it would take $2,089,286. Larger potential yields require greater risk, and a retirement plan cannot afford a miscalculation. It could afford a small decline if it selected 5% as a target, but could not afford a large percentage loss in stocks or anything else. Under today's circumstances, it would be prudent to choose a 5-7% yield for a working retirement fund model.
To recap our model, we want to retire at age 65 with a retirement fund, accumulated from age 40 to age 65, of at least $2,925,000 invested at 5-7%. To accumulate $2,925,000 in 25 years at 5% requires an annual contribution of $57,559, assuming a defined-benefit retirement plan with no withdrawals until age 65. To accomplish the same goal in 20 years under the same plan would take $83,333 a year, and to do it in 15 years would take $128,000 a year.
To accumulate $2,925,000 in 25 years at 7% would require an annual contribution of $42,000. To accomplish the same goal in 20 years would take $65,226 a year, and to do it in 15 years would require an annual contribution of $107,050. The 25-year plan looks most feasible. If interest rates rise, it would be well to continue the same contribution and accumulate the fund faster. Also, a caveat to this specific plan is that it cannot account for future inflation and variations in the investment market.
Those who do not have a retirement plan and do not have 25 years of practice life left would do well to maximize annual contributions for the time they do have. They may have to postpone retirement just for the purpose of accumulating retirement funds.
The bottom line for virtually all orthodontists is, whether you like it or not, there is a retirement in your future.