Replacing your working income

By Brian Hufford, CPA, CFP®

With the start of a new year, it is time to revisit your retirement goals. These are strange times. Five years ago, dentists wanted to determine a “safe withdrawal” rate from retirement assets. Is a safe withdrawal rate 5% of retirement savings, or is 4% a safe rate? In other words, if I have $3 million in savings, can I have a retirement income from investments of $150,000, or should I plan on $120,000 throughout my life? Today, I never hear the concept of a safe withdrawal rate discussed. It is as if the hope of replacing working income with income from savings has been abandoned. There is currently little belief in a safe withdrawal rate from retirement investments. A safe retirement is now viewed as a job, hopefully with more time off from work.

How would you characterize your mindset about the future right now? Are you moving toward a bigger future, or are you in survival mode? How do you define financial freedom? Do you achieve financial freedom from saving and investing, or do you achieve it by paying off debt and maintaining an emergency cash reserve? Make no mistake, we are in a secular bear market, which began in the year 2000 and which could extend another five years or more. Dentists are facing economically challenging times just like everyone else. Yet there are traits that I have found among dentists who are moving toward a bigger future, and those who are condemned to merely relive the past one day at a time, indefinitely.

On saving

We have recently completed an engagement that we call Retire on Time with Confidence™, which assesses a dentist’s preparation for a successful retirement. What I have noticed in conducting dozens of these is that participants currently seem frozen in the moment, unable to move intentionally toward the future. With uncertainty about next month’s production, let alone the ability to achieve a return on investments, dentists simply aren’t saving enough. One would think that the opposite would be true — with uncertainty, dentists would be saving more.

Some have experienced a recent savings-stopping decrease in income, but most are simply not motivated to pursue a bigger-future goal. Don’t let uncertainty sabotage your savings goal. You should be saving 20% of income each year. Because of large fixed expenditures in dentistry, savings requires knowledgeable leadership from the dentist/small-business owner to consistently pursue a 20% savings goal. It involves very intentional planning for debt repayment, equipment purchases, and lifestyle spending.

On investing

In a secular bull market (a long upward market), such as from 1982 to 2000, investors experienced market volatility with the belief that they should buy the dips. Each market correction was a buying opportunity. In a secular bear market (a long downward or sideways market), volatility is viewed as the beginning of a bigger decline. Many view each correction in the market as a reason to move to cash.

There are really only two choices one has in a secular bear market period such as the present one. One can either choose to invest for a future with the hope of replacing working income, or one can store cash for survival. Survival is all about debt elimination, a cash reserve, and planning to work as long as one is physically able. Replacing working income requires saving for the future and investing. During this secular bear market that began in 2000, we have had two major declines, one from 2000 to 2002, and one in 2008.

History would indicate that most secular bears have three to five market corrections during the average secular bear period of 18 years. Not every correction in a secular bear is a goal-ending event. Some in the past were merely normal market corrections that were quickly retraced.

In the end, I believe one should either choose investing for a retirement goal, or choose staying in cash for a survival goal and stick with that choice. These are two very different goals and are incompatibly pursued at the same time. A survival goal will not replace working income.

On leadership

Difficult times are a test of leadership. We may not be able to control future economic events, but we can control our own behavior in pursuing a bigger future. This starts with realistic goals and annual plans to align our actions with the hope of a successful outcome. This means that survival is too small a world to inhabit. Saving 20% of income and investing for the long term in a disciplined manner is the only acceptable path.

Brian Hufford, CPA, CFP®, is CEO of Hufford Financial Advisors, LLC, an independent, fee-only planning firm that helps dentists achieve financial peace of mind. Contact Hufford at (888) 470-3064 or [email protected].