Brian Hufford, CPA, CFP
It wasn't really that long ago when 401(k) plans became the primary source of retirement funding for dentists. Prior to the advent of new 401(k) plan rules in the 2000s, traditional defined-contribution plans (e.g., money purchase and profit-sharing plans) were often the go-to retirement savings vehicles. Not only did the new rules usher in an attractive tax-deductible path, but, ironically, 401(k) plans themselves somehow became the subject of quite a bit of controversy (try typing "401(k) hoax" into an Internet browser). Many in this crowd point to a distrust of Wall Street and prefer the guarantees of insurance-based solutions.
To me, this can seem like Darth Vader questioning the motives of Emperor Palpatine (please forgive the Star Wars reference). Happily, recent Department of Labor regulations regarding fiduciary retirement advice have introduced a new rule of law into a universe threatened by Death Stars, both from Wall Street and the insurance industry.
If you have selected a 401(k) plan as your means to a successful retirement-funding outcome, then congratulations. I think you have made a wise choice. But why not convert your 401(k) plan into a real retirement plan by mastering two important planning strategies?
The first strategy involves calculating the amount you need to save each working year to provide for adequate retirement spending. I fear many dentists and their advisors haven't performed this calculation and simply make 401(k) plan contributions at some predetermined level with little or no connection to their long-term financial plan. Yikes! The result is a lack of alignment between how or how much a dentist saves and his or her ultimate retirement goals.
In formal defined-benefits plans, actuaries employ a scientific method for matching plan assets (i.e., current investments and future annual employer savings) to plan liabilities (i.e., promised future retirement payments). This scientific, mathematical calculation is called funded status. It is updated each year. You can easily apply this mathematical discipline to determine whether your 401(k) plan savings match your retirement spending needs. Keep in mind, though, that funded status is unrelated to statutory 401(k) plan maximum contribution levels. A funded status of 100% means that the value of investments in your 401(k) plan and the level of your current savings are on track to achieve your desired retirement spending needs. You don't need an actuary to do this calculation. You simply need someone familiar with the math.
The second strategy for converting your 401(k) plan into a real retirement plan involves getting knowledgeable advice about how to obtain the best custom plan design for your needs. This means finding the plan that allows you to deduct all of the savings required to achieve a funded status of 100% with an affordable staff cost. Let's assume you need to save $53,000 in 2016 to achieve a funded status of 100% and your current 401(k) plan design only allows you a deductible savings limit of $25,000. By having the profit-sharing plan amended to allow for a full maximum contribution in 2016 of $53,000, come tax time you can deduct the savings needed to achieve your retirement spending goals.
Over my 39 years of advising dentists on retirement plan topics, I have been struck by how important it is for each dentist to embrace a leadership role in his or her own retirement outcome. Accountants don't necessarily concern themselves with whether you are saving enough. Plan administrators don't always know all the retirement plan design rules, or whether you have the best plan design to achieve your specific objectives. Investment and insurance advisors may have a bias toward certain types of products disconnected from your goals.
I rely on my dentist to maintain a healthy mouth, and that charge is squarely within his purview. There isn't necessarily a corresponding strategic advisor among your team of accountants, plan administrators, investment advisors, and insurance advisors who is concerned with a healthy retirement outcome for you. They may each be excellent at their individual roles, but that could still leave you as the sole party responsible for orchestrating a successful retirement outcome.
It is ironic to me that retirement planning has been a central passion of my professional career, and yet retirement itself seems undesirable to me. Most dentists feel the same way, I suspect. On the other hand, the only true definition of being "rich" is the ability to maintain basic spending needs from savings and not from working income. In that regard, a 401(k) plan may be the best strategy to achieve true wealth, whether you (or I) want to retire or not.
Brian Hufford, CPA, CFP, is a wealth advisor and dental practice thought leader with Buckingham Advisors, a national, independent wealth and financial advisory firm with a specialty in helping dentists achieve their most important goals. To connect with Brian and Buckingham, visit BuckinghamAdvisor.com, call (866) 545-8816, or e-mail [email protected].
