20 Jun Work 40% Less… Retire 10 Years Sooner
Dr. Jack Smith (not his real name) was tired and frustrated. He was 45 years old and already showing signs of professional burnout. When our consultation started, the first thing out of his mouth was “You helped a buddy of mine buy a practice and merge it into his practice and he is making a lot of money. Is there anything you can do for me that will allow me to increase my income so I can fund my retirement plan quicker? I want to retire as soon as I possibly can!”
I asked him how many days a week he was currently working and he said five. I asked him what his annual gross practice income was and he said about $600,000. I also asked him how much he had in his pension and IRA’s and he said about $250,000. He added he had done well with his investment portfolio so far. I asked how much annual after-tax income he would need to retire if his kids were finished with school and his debts were fully paid off. He thought a few minutes and said he guessed $60,000 would be enough if he didn’t owe any money at all. I asked how much he owed on his home and he said he still owed about $200,000.
We talked for a couple of hours more and I learned a lot about Jack’s practice and more about him as a person. We talked about his goals and objectives. He loves doing things with his kids but was frustrated that he didn’t have the time to do as much as he wanted. He likes playing golf and tennis but was so tired from working hard for 5 days every week that he didn’t have time to enjoy either very often. He likes to travel with his wife and kids, but he hasn’t been on a vacation other than to a dental convention in over 6 years. I asked Jack how long he thought he could work and he said that he knew he would have to work at least until age 62 and probably until age 65 to have enough to retire. He added, “That is, of course, unless you find me a sweet deal that I can afford to buy that makes me a lot of money!”
Jack’s practice was located in a great area of a very popular southern city. I estimated that his practice had a market value of about $500,000 (give or take $25,000 or so). I did a little more calculating and told him I had the answer that would make his dreams come true. He leaned up in his chair and stared at me with complete focus and undivided attention. I said, “Jack, I want you to reduce your clinical time from 5 days to 3 days a week”. He said “Yea right, for how long?” I told him until you either reduce your clinical time down to 2 days or retire, whichever comes first!
Jack looked at me and actually had a tear in the corner of his eye. He said “I have been sitting here pouring my heart out to you for more that 2 hours and begging for help and you think its all a big joke! I thought you were a professional with real answers to real problems.” I said, “Jack, I’m not joking. I do want you to reduce your clinical time to 3 days a week.”
Jack shook his head. He said he could see how reducing clinical time would give him time for his family, but he said he could not afford to lose 2 days of income. He also told me he had 5-day hygiene coverage in his practice and would have to be there for 5 days anyway to check hygiene patients.
I told Jack that he did not let me finish telling him the rest of the plan. I said, “Jack, I want you to limit your clinical time to just 3 days a week and I also want you to sell your practice.”
Now Jack really thought I was nuts. He even started laughing out load. He got up, shook my hand and said he was sorry to have used up so much of my time. He added that he really needed to be going.
I was successful in getting Jack to stay and talk some more and we sat down together to work through the numbers. I explained the 80/20 business rule and how currently about 20% of Jack’s patients were providing 80% of his annual gross income. Jack agreed and also agreed that if he could spend all of his clinical time JUST working with this 20% group that he could probably produce 100% (maybe even more) of what he currently does with his entire patient base. He recognized that the other 80% of his patient base was preventing him from fully maximizing the potential of the high-quality 20% patient group. Jack also agreed that certain procedures he did most everyday were time-consuming and not very profitable. He said that it was these tedious, unproductive procedures that kept him so tired and depressed all the time. He saw that if he could indeed limit his time to the high dollar, high profit procedures that he could easily produce in 3 days a week what he is currently producing in 5 days. In fact, Jack figured he could actually do it in 2 days a week if he didn’t have to stop all the time and check hygiene. In summary, Jack totally agreed that he could increase his annual income and only work 3 days a week if he had another doctor to handle the less- productive patients and procedures.
Jack and I then worked through his retirement numbers. I showed Jack that it would take an accumulation of $1,250,000 to have adequate principal for he and his wife to maintain a constant flow of income that they could not outlive. This assumed that his principal would be invested at only 6.25%. The $1,600,000 would spin off annual earnings of $100,000 and after a 40% income tax bite would give Jack and his wife the $60,000 after-tax income he desired.
I explained that Jack’s current retirement savings of $250,000 would be worth $648,425 in 10 years if he maintained an earnings rate of 10%. I also showed him that if he would sell his practice today for $500,000 that after taxes and fees he would have another
$375,000 to invest toward retirement. This would provide him another $972,653 in 10 years. Jack would have $1,621,078, which represents his entire retirement fund needs by age 55, and this does not consider any contributions to savings from his current income each year. I also reminded Jack that if he sold his practice, he would no longer be responsible for making pension contributions for his staff each year or would he have any overhead, thus providing Jack with even more freed up income each year.
That led us into a discussion of Jack’s current income needs. I explained to Jack that if he sold his practice thereby fully satisfying his retirement needs, it would free up all the dollars he was currently contributing to savings to get totally free of debt. I reminded him that his annual income should actually increase when he could pick and choose the procedures and the patients he wanted.
Jack and I ended up spending about 6 hours together that day and he signed a listing agreement to sell his practice. We found a practitioner in the area to buy Jack’s practice and the purchaser merged his practice into Jack’s location. The practice sold for $520,000. Jack cut his time back to 3 days (Monday through Wednesday and enjoyed 4 day weekend every week). Jack’s produced 15% more than he had the previous year even though he was only working 3 days a week. Jack quit doing most of the procedures that he hated and quit checking hygiene after the second year. Jack is now retired and doing well.
THE REST OF THE STORY: For all you purists out there, the story was changed a little to make it easier to see the point. Jack actually used the proceeds from the sale of his practice to immediately get out of debt and doubled up on his annual retirement savings both inside and outside a pension plan. As an independent contractor, Jack was able to set up a self-employed pension plan that allowed him to make tax- deductible contributions only for himself; no staff. He also contributed substantial after- tax dollars each year into tax-deferred annuities. These earnings compounded tax deferred. His annuities allow him to draw funds without penalty at age 52 (or any age for that matter) and his pension funds are in reserve for when he reaches an age that he can withdraw those funds as needed without penalties.
Jack retired two years ago at age 52. He is now living on the side of a mountain in a cabin (you ought to see the size of this thing) that he and his wife built themselves. Heck they had to do something with their 4-day weekends (remember Jack only worked 3 days a week for the last 7 years of his dental career) and the extra money he was making each year “cherry-picking” only the profitable procedures. Jack is financially secure and totally debt free… and still young!
You have many options that you probably have never considered. Call PARAGON today. We can design a “Quality of Life” plan for you that will help you get the most out of your career as well as get out alive and well. Jack did it! So can you!
By the way, we are currently talking to Jack about being a transition consultant for PARAGON and showing doctors like you how to do what he did. The only problem is, Jack doesn’t have to work any longer, so he may not be interested!