17 Jun The Correct Decision

The purpose of this article is to illustrate how important initial decisions can be on your entire career. Decisions you make now do have a major impact on your overall financial situation. We understand that many young doctors are not concerned about saving for retirement early in their career. However, we also know that some of you do understand the importance of beginning an investment plan early. This article is for those of you who want to maximize their income potential.

Every dentist will only practice dentistry a certain number of years. We obviously can’t predict how many years that will turn out to be for you because there are simply too many factors that can’t be controlled. But, hopefully this article will be able to show you how important it is financially that you make every year count!

Let’s say, we can look into our crystal ball and determine that you will have exactly 35 years to practice dentistry. Obviously this means that you will have 35 years to earn income as a dentist. The amount of money you earn during those 35 years, as well as how much money you will accumulate at the end of those 35 years, depends greatly on the decisions you make very early in your career. It also greatly depends on how well you take advantage of your years in practice.

For our illustration, let’s say that a reasonable average net income (the money you take home after paying all of your practice expenses and debt obligations) for a dentist is $250,000 per year. Over 35 years that equates to $8,750,000 of potential career earnings.

Now, let’s say the first year after you graduate from dental school, you do what so many of your colleagues have done and take a position as an associate. Let’s also assume you earn $90,000 (an excellent associate income in most dental market areas) during that year as an associate.

Was becoming an associate a sound financial decision? Let’s see…

Even though your associate income was above average at $90,000, the fact is that you forfeited $160,000 in career earnings because you gave up 1 of your 35 earning years in return for a $90,000 associate position instead of the $250,000 you could have earned had you opted to acquire a practice straight out of dental school!

Admittedly, $160,000 may not appear to be that significant in the overall scope of an entire 35 year dental career that would produce earnings of $8,750,000, but is $160,000 lost so early in your career really just $160,000?

Keep in mind that now you only have 34 years to earn income as a dentist. Let’s assume you took a different direction and the $160,000 you decided to forgo was earned and was invested in a tax-free annuity over those remaining 34 years. Let’s also assume the annual compound interest rate for that tax-deferred annuity is 10%. But, let’s first take out the income taxes you would have paid on that $160,000 income. Income taxes would equate to approximately $56,000, leaving you with a net investment of $104,000. You will probably be shocked to realize that $104,000 invested in such an annuity would grow to $2,656,958 over that 34 year period.

Okay, now let’s see what happens if you decide to associate for a second year before opting for practice ownership. Let’s also assume that your associate income increases to $100,000 in that second year. You would now be losing $150,000 in potential earnings ($250,000 potential income minus the $100,000 earned). If you had earned that extra $150,000 and deducted the taxes your net amount for investment would be $97,500. If you had invested that $97,500 in a tax-deferred annuity at 10%, it would grow to $2,264,453 over the next 33 years.

So, in the first two years following graduation, you would have earned a total of $190,000 pre-tax earnings as an associate ($90,000 the first year and $100,000 the second year). But, you have a potential loss of lifetime income of $4,921,411 by not being able to invest the extra $104,000 after-tax earnings your first year and the extra $97,500 after-tax earnings the second year.

If you feel that a 10% interest rate is too aggressive to assume, then let’s use a 5% rate. Due to less compounding of interest, your total lost lifetime income would then only be $1,034,159. Everyone can afford to throw away a mere million dollars, right?

You can shoot down the total amount of loss with whatever argument you wish to use, BUT, the fact remains that you will encounter a significant loss of some amount that can not be reclaimed. The decisions you make early in your career are much more significant to your future financial situation than you probably realize!

Once you forgo income, the positive impact of that income is lost forever. The most valuable savings dollars you will ever have will be your first savings dollars. This is because those initial dollars will have longer to grow through the magic of compound interest.

Discover for yourself what good decisions can do for you. Of course, the first correct decision is to call PARAGON today to discuss your valuable options!