Clayton Davis, DMD 

Hint: It wasn’t because I was cold. 

A First Impression I Will Not Forget 

One of the activities my family enjoyed on our vacation to Ireland 25 years ago was visiting the famous McGee tweed factory in Donegal. They had a loom set up so visitors could pick out threads, weave with the shuttlecock, and make a pattern. My children were at an age when that was very entertaining. 

On our last day in Ireland, we walked the main street of Sligo and stopped in the Mullaney Brothers haberdashery. While my wife looked for a few things, I waited with no intention of buying. An elderly gentleman walked up behind me, and with a charming Irish brogue asked, “I say, sir, are those your children over there?” I said, “Yes.” And he said, “Oh, they’re fine looking  children. They are a credit to you, well behaved.”  

As the conversation proceeded, he introduced himself as Mr. Johnny Mullaney. He inquired about where I lived and what we had done while in Ireland. He mentioned how he enjoyed watching the Olympics in my hometown of Atlanta. He knew a lot about Markree Castle, our accommodation for the week, and Rosses Point, a golf course I played at. He enthusiastically shared his opinion of its famous 18th hole. He was immensely proud of the golf course. Then he mentioned the pride they had in their tweed jackets made from tweed from the McGee tweed factory.  

He pointed to the jackets and asked which of the tweeds I liked best. I pointed to one and he said I appeared to be size 41L (exactly right), and before I knew it, he had slipped the jacket over my shoulders. As he brushed his hands over my shoulders and down the sleeves and tugged at the cuffs and bottom of the jacket, it felt tailor-made for me. I told him I liked the way it fit, but our luggage would be tightly packed for our trip home. I expressed my concern the jacket would end up badly wrinkled. He said, “Oh, it’s tweed, sir. We can fold it very nicely and have it ready for you to pack and it will unfold without wrinkles when you get home.” 

I liked the look of the jacket, yes, and I appreciated the quality of McGee tweed. But ultimately, what I appreciated most, what made me want the jacket, was Johnny Mullaney, himself; the consummate haberdasher, a master at his craft, who won me over by becoming my friend in a mere five minutes.  

I thought, “I don’t have a memento of this trip. This jacket will always remind me of our wonderful trip, our day at McGee factory, and this endearing Irish businessman.” I said, “Mr. Mullaney, I will take the jacket.” 

What I Learned from that Lasting Impression 

There are four elements from meeting Johnny Mullaney that I apply to meeting every new patient in a preclinical interview: 

1. Make a friend. (How can you trust each other if you don’t become friends?) 

1. Make an invitation. (Accepting an offer to be examined makes co-discovery exams flow.) 

1. Make it easy. (Find out their concerns, and address them.) 

1. Connect the feeling to the choice. (People do business with people they like.) 

You see, we always make choices based on our feelings. The preclinical conversation allows the new patient to feel good about my desire to genuinely help them and understand their feelings and needs. This is how we can move forward toward optimal care.  

A Series of Invitations Lead to the Treatment “Yes” 

When dentists ask me how they can do more cosmetic and restorative cases, they are usually surprised when I tell them it begins with doing pre-clinical conversations at the first visit.  

• You can’t do comprehensive cosmetic and restorative treatment until you’ve presented a treatment plan.  

• You can’t produce a treatment plan until you’ve done a good diagnosis.  
• You can’t produce a diagnosis until you’ve done a thorough exam. 
• And that thorough exam is incomplete when it doesn’t start as a good preclinical conversation with the new patient. 

The preclinical conversation sets the tone for trust and healthy open communication. It is the essential first step in creating a lasting good impression that leads to the first “yes” in a series of invitations on the way to treatment.  

Charlie Ward, DDS  

Whether you want to use a digital SLR camera for documentation, patient education, lab communication, making presentations at dental events, dental publications, or accreditation in the American Academy of Cosmetic Dentistry, you have choices to consider in multiple price ranges.  

Dentists can spend $1,800 and get a good system for documenting cases, patient education and lab communication. Dentists can easily spend $3,800 or more on a setup to equip themselves to take higher quality images. 

Camera Body: Most dentists shoot with a Nikon or Cannon DSLR camera. These are comparable brands. My experience is with Canon but my lab technician uses Nikon and gets wonderful results. I am shooting with the Canon EOS 90D. The comparable Nikon is the D7500. More entry-level models are the Nikon 3500 and the Canon Rebel T8i. 

Lenses: We can get a third-party Sigma 105mm or a Tokina 105mm lens that gives us decent quality, or we can purchase the Canon 100mm or Nikon 105mm version at twice the price. When I upgraded to the finer Canon lens, I noticed a huge difference in image quality. I recommend an upgraded lens for the highest-quality images you need for accreditation. 

Flashes: The ring flash is a great entry-level option and significantly less expensive but there are limitations to what you can do to control your light. I’ve been using a dual point flash for some time. I can pull a flash off and shoot from a different angle. By changing where the light is coming from, I can accentuate the angle lines for more depth and visual clarity.  

Sometimes, I’ll take one of my flashes off, hold it on the opposite side of what I am shooting, and shoot the flash back into the lens of the camera. When I do this, I get an ethereal-appearing image or an image with a white background. I appreciate the versatility of using the dual point system.  

For my best-looking images and portraits, I’ll use softboxes. This gives smoother, more diffuse light and a beautiful appearance. These are necessary for everyday dentistry but make a huge difference in showcasing aesthetic cases.  

Consider the Long Term: When dentists invest in cameras and lenses, they typically use them for a long time. If you are on the fence about how much you want to invest, my own experience might be helpful. I honestly wish that I had upgraded sooner than I did with the Canon EOS 90D and the Canon 100mm lens. After taking photos for 12 years, the upgraded equipment has only increased the joy I have for photography and pushed me to take more pictures! 

Do You Know Your Team’s Threshold? 

Robyn Reis, Dental Practice Coach 

While visiting a dental practice that had amazing hospitality and incredible relationships with its patients, I observed a doctor’s presentation to a patient who was in his forties and who had been saving for a smile makeover for a long time. The doctor did an amazing job with his presentation of what was possible and the phases of treatment. The patient was very excited, even teary-eyed.  

The patient wanted to get started and asked about the cost. The doctor said, “You know what? My team at the front are experts in figuring that out.” So, the patient was taken to the front and handed over beautifully. In a few minutes, he was presented with the treatment plan on paper with the approximate dollar amounts. In phases, they would do the full mouth. All seemed to be going well until it wasn’t. 

Intrinsically, everyone has a monetary threshold that up to a certain point, you have no problem with the amount. It’s something within your range of expectations and easy to say yes. When you cross that threshold, anxiety may creep in and for sure, you become uncomfortable.  This is what I witnessed in a matter of moments. 

I observed the front office team member look uncomfortable after glancing at the paperwork, despite being experienced with treatment presentations. The clinical assistant who had been part of the diagnosis and treatment planning process, would also help with scheduling and any questions. 

Together, they gave the patient the opportunity to ask questions after reviewing the plan again. The full mouth restoration was going to be in the neighborhood of $25,000. The first phase would be about $18,000. They offered CareCredit financing. The patient said, “It’s only $25,000 and I have $20,000 saved. This is wonderful! I don’t know how I will pay the other $5,000, but I know I have the means. It’s only $25,000.”  

The team appeared somewhat shocked because they were obviously uncomfortable with quoting that amount. This treatment plan crossed their personal thresholds. They suggested the patient go home and sleep on it “because this was a big investment.” The patient was so committed to moving forward that, despite their advice, he scheduled his first appointment. He would call them back once he figured out how to pay the remaining balance, knowing insurance would contribute very little. 

What I also found interesting was that neither team member asked for a deposit. No money was exchanged to reserve an extended appointment. The patient could back out and the doctor’s time spent on the case work-up would be uncompensated. In my experience, making a signed financial agreement would be the responsible step to take at this stage.  

This example illustrates the discomfort many dental teams feel about asking for a deposit if the treatment estimate crosses their personal threshold. Of course, dental teams will want to explain what can be done to make treatment more affordable and the financing options that are available. But it is beneficial for team members to understand their personal threshold and to become comfortable saying, “Grab your checkbook or pull out your credit card, Mr. Jones. Here’s what your investment is going to be to get started.”  

What’s your threshold? This is a great team exercise you can do at your next meeting because a patient might ask anyone they interact with about the cost of dentistry, and what options you offer for the dentistry they want.  Every team member will benefit from considering their personal threshold and discussing it — even role-playing — to become comfortable with the best ways to manage these questions. Depending on the situation, it could be referring the patient to the treatment coordinator or to the financial administrator to have a comfortable conversation. 

It is my belief that when patients are excited about what the treatment results will be and they want to move forward, it’s the right time to ask the patient to make a financial commitment to get the process started. 

Personal Finance Tips for New Dentists 

Kelly Brady, MBA 

Here are a few thoughts I hope are helpful for young dentists starting out in their careers. 

I Would Make Buying Disability and Life Insurance a Priority. 

I recommend that you have personal disability insurance and that you make sure it has own-occupation and guaranteed renewable features. Disability insurance protects you from the financial risk of losing your income if you become sick or disabled and you cannot work. Own-occupation policies allow you to claim disability insurance benefits even if you can earn an income doing something other than your most recent job. 

Personal disability plans have add-ons that vary from state to state and company to company. The most expensive add-on is the COLA or cost of living adjustment. That will nearly double the price of the plan. If you struggle with wanting to pay the premiums, then don’t get this add-on. The price can be kept low by buying a plan that has a 90-day period before coverage kicks in. 

If you have dependents or you expect to buy a practice, I recommend that you buy term life insurance. At some point in the future, you’ll probably need to pledge life insurance against the practice. If you do not own a practice yet, I recommend that you avoid whole life, permanent life, and universal life policies, as they are more expensive, loaded with fees, and the person selling them is making a large commission.  

If You Build an Emergency Fund, You Will Be More Secure. 

The next thing I recommend is to build an emergency fund that is not invested in the stock market but rather kept in a savings or money market account, or invested in government treasury bills that are short-term. This way, if there is an emergency, the money’s available and there are no surprises. A good rule of thumb is to have emergency savings that equal three to six months of your income. If you have a disability policy that won’t kick in for 90 days and are disabled, you will be glad you have this 

Take Advantage of an Employer Retirement Plan. 

If you have access to an employer retirement plan, maybe even in your own practice, make regular contributions. If you are employed by a dental practice that contributes a matching percentage, contribute enough to get the match. Dental practice owners can set up an employer retirement plan. A recent PankeyGram article by Dr. Mark Kleive provides great advice for doing that.  

Pay Off Credit Card Debt. 

It makes sense to pay off higher-interest credit cards first. Keep in mind that If the interest is the same, it makes sense to pay off the personal debt first because the business card interest is tax deductible, essentially lowering the rate of interest. 

What if paying down debt means you don’t have the ability to save for retirement? Ideally, you will maximize saving/investing in tax-advantaged accounts like IRAs and 529 college savings accounts. But if you are paying down debt, the 20% annual interest you are saving is like getting a 20% investment return with no risk.  

For some people, paying off debt or investing in retirement is a choice they must make. Some can’t sleep at night worrying about one more than the other. Because different people have different priorities and personal situations, I recommend that you get a second opinion to help you decide. 

What About Dental School Loans? 

Dentists can pay off student loans by sticking to a regular monthly payment plan, refinancing to pay them off faster, or consolidating with a personal loan. 

One of the things that I take the opportunity to do every year in January is evaluate my fees. I am disciplined about this because the cost of doing business goes up every year.  

Whether it is a low inflationary time when the cost of doing business has gone up 1-1.5%, or it is more like the recent period when the cost of doing business has gone up 7-10%, our profitability is going to decrease if we don’t adjust our fees. When profitability decreases, usually the dentist’s compensation decreases.  

The Fee-by-Fee Way 

We can go through our fee schedule, fee by fee, and raise them individually. Dentists who do this are concerned that they will lose patients if they raise certain fees, for example, their fees for regular recall exams and dental cleanings. Dentists who take the fee-by-fee approach tend to believe patients are less price sensitive to the cost of restorative dentistry and appliances. Some dentists cover the increasing costs of Hygiene by increasing the fees for their restorative procedures. 

The Global Way 

Alternatively, we can do a global fee increase that raises every fee by the same percentage. This is my preferred way. To select the rate, I will look at my 2023 end-of-year profit and loss statement (from my accountant) and compare it to my 2022 end-of-year profit and loss statement. Did I make a profit in 2023? Was it higher or lower than in 2022? I don’t want to make less profit year to year.  

I will also look hard at my practice’s operating expenses in 2023 compared to 2022. I expect 2023 will be significantly higher because we have gone through high inflation in 2023 that none of us could have reliably predicted at the end of 2022.  

For example, if overhead was 65% in 2022 and jumped to 68% in 2023, I must increase my fees by at least 3%, plus a percentage I anticipate will cover overhead increases in 2024. If my profitability decreased in 2023, I also would want to compensate for that loss in the future. (Our “healthy business” goal each year is to maintain and hopefully increase profitability.) 

To arrive at the final percentage that I will raise my fees across the board, I will factor in the raises I want to give my team and myself in 2024, and the other expenses I know (or anticipate) will go up.  

The Global Way Is Easier 

If we do piecemeal fee increases, it becomes a complicated set of mathematics to determine if we will recapture last year’s decrease in profitability, cover next year’s increase in overhead, and hopefully increase our profitability over the next year. If you want to be cautious, you can blend the two approaches. Do a global increase and then go back and look at the price-sensitive fees you are concerned about and lower just those. This is the Modified Global approach. 

Evaluate Your Fees Early in 2024 

Annual evaluation of our fee is a must-do, and I don’t think there has ever been a better time to raise fees in all the years I have practiced. We live in a time when everything costs more. Patients understand that our overhead costs have increased. They know we are running a business and want us to stay in business to be there for them. 

I encourage you to use a system of thinking to figure out which fees you will raise and how much you will raise them. I advocate for the global approach or the modified global approach. Ask your accountant to give you profit and loss statements for 2022 and 2023. If you need help with your evaluation, ask your accountant or practice management consultant to assist you. 

Umbrella liability coverage provides additional liability protection over and above your existing policies. A personal umbrella is going to provide that coverage over your auto insurance, your boat insurance, and your renters or homeowners insurance.

Typically, you must have a minimum amount of coverage in each of those areas. Usually, it’s $300,000 in bodily injury for your auto and about a hundred thousand in property damage. And then also for your homeowners, you usually need a minimum of $300,000 in liability coverage for your homeowners or renter’s policy. For example, if you have an auto claim where you’re at fault, and there is a half million dollars in bodily injury and the underlying limits on your policy are $300,000, your policy will pay the $300,000. The additional $200,000 that you owe would be paid by the umbrella. With a one-million-dollar umbrella, you have $1.3 million in coverage.

Umbrellas Provide a Lot for Relatively Little

By buying an umbrella policy, you’re adding a lot more protection at a very low cost. They come in increments of a million dollars, and you can buy several million more.

The beauty of this is that that policy may only cost a few hundred dollars a year depending on the features you might add to it. Umbrella policies might protect against some unusual things, for example, slander and liability claims. If you have a second home that you visit or rent, the umbrella will usually cover the liability.

Life is full of surprises, so it is wise to have a lot more coverage than the minimum homeowners and renters insurance policies provide.

Commercial Property Insurance

I think every dentist needs at least a one-million-dollar umbrella covering their commercial property. If something happens on your property for which you are liable, a lawsuit can run into high dollars—some run into multiple millions. If you have $1.5 million in commercial assets, at least $2 million in total liability coverage would be appropriate. Someone could have a $2-million-claim by tripping and falling, even if your commercial assets do not amount to that much.

Professional Liability Insurance

Regarding professional liability, you can’t buy an umbrella but you can buy more base coverage. Base coverage is usually available in million-dollar increments. If you have concerns, contact your insurance providers, as well as other providers to compare policies and costs. It could be inexpensive for you to have the extra financial security of an umbrella.

Additional Considerations

• When purchasing umbrella liability insurance, the extra millions above the first million are usually less expensive than that first million.
• If you have children under the age of 25 who are drivers under your auto insurance policy, an umbrella policy will have an added charge to cover the extra risk of the young driver.
• If someone were to injure you or your auto and they are underinsured, your auto insurance liability umbrella might kick in and cover your expenses. That’s something to look into and consider when making insurance choices.

As I’ve been giving presentations about business systems to dentists, I’ve discovered that there are six prevalent myths surrounding 401k retirement plans. In Parts 1 and 2 of this series, I hope to help dentists who are also small business owners develop a better understanding of what is possible.

Myth 4: It’s Possible for a 401(k) Plan to Be Free

The reality is that a 401(k) plan is never free. Equitable, for example, has a specific retirement plan for dentists. They claim to have a plan with no direct costs for dentists. What they do is take a part of the participants’ total investment to cover the costs. In most cases, the person paying the highest percentage of the fee is the dentist because the dentist puts the largest amount into the fund. As a dental practice owner, I don’t want the costs to come from my account. Instead, I want my business to cover the costs because the fees are tax deductible for the business and my retirement funds accumulate to their greatest potential.

When someone is marketing a free plan, be aware that there is no free plan and the costs are going to come out of your account, just as much or more as any participant’s account in the plan and those costs are not going to be tax deductible on personal taxes. In the case of Equitable, about 20% of your earnings are being siphoned off for fees and this has a significant drag on your net accumulation.

Myth 5: Being a 401(k) Fiduciary Is Risky

The first responsibility of being a plan sponsor is that you have the fiduciary responsibility. No one else can assume that responsibility. I believe you can meet your fiduciary responsibilities rather simply by doing the following.

The 6 Fiduciary Responsibilities Are to:

1. Meet financial investment responsibilities.
2. Meeting administrative responsibilities.
3. Pay only reasonable expenses from plan assets.
4. Deposit employee contributions timely.
5. Maintain adequate ERISA fidelity bond coverage.
6. Select and monitor 401(k) service providers.

You do need to maintain fidelity bond coverage, and $50,000 to $100,000 of bond coverage costs $200 to $300 per year. I do not think this is expensive and I think it is not difficult to fulfill your fiduciary responsibilities.

Myth 6: Switching to a Low Cost 401(k) Provider Is Difficult

An existing 401(k) plan cannot be simply terminated and then you start a new one. You must go through the following four steps, but this is easy to do.

The 4 Steps in the Conversion Process Are:

1. Asset transfer
2. Document preparation
3. Investment selection
4. Participant enrollment

Here are two examples of vetted companies that I believe provide low-cost plans with robust features. The first is 401Go.com. It provides advisor-led retirement plans for small businesses. This company is very easy to work with, has payroll integration, and you can set convert your plan quickly.

The second company is EmployeeFiduciary.com. This company has incredibly low establishment and conversion fees—some of the lowest in the industry. With Employee Fiduciary, you have access to 30,000 share classes and 377 fund families. These include low-cost options like Vanguard, Fidelity, and Schwab index and exchange-traded funds. You can also elect to include a self-directed brokerage account from TD Ameritrade, which allows you to invest in any fund on the market.

I hope this instills some curiosity in understanding your existing 401(k) plan. Examine your fees and your options if you were to convert your plan. I encourage you to do this because fees can significantly drag down your investment accumulation over time.

If you are interested in taking a deeper dive into financial freedom, I highly encourage you to sign up for Mastering Business Essentials. This course is the blueprint for running a dental practice with long-term growth.

As I’ve been giving presentations about business systems to dentists, I’ve discovered that there are six prevalent myths surrounding 401k retirement plans. In this brief article, I hope to help dentists who are also small business owners develop a better understanding of what is actually possible.

Myth 1: Fees for 401k Plans Are Similar

Based on research I have done and the dentists’ existing plans they have shared with me, there are marked fee differences between similar plans. In comparing two “young” plans with just over $200,000 invested for 16 employees I discovered a $3,000 difference in annual fees. This $3,000 annual fee difference represented a 60% increase in cost between the plans. The compounding effect of these fee savings over many years is hundreds of thousands of dollars.

Myth 2: Setting Up a 401k Plan Is Difficult

As dentists shop around for a plan, they often are told that it is difficult to set up a 401k plan that meets the government’s requirements for a broad investment strategy. I view this myth as a sales scare tactic. You can set up your own plan and easily meet the government’s standards. The federal government offers a plan for federal employees—the Thrift Savings Plan (TSP), which is a plan they can easily simulate.

Myth 3: Employers Must Hire a Professional Investment Advisor for 401k Investment Funds Selection

With every 401k plan, there are three responsible parties:

1. The plan sponsor
2. The plan administrator
3. The investment platform provider

The plan sponsor is the dentist/employer and has the overall fiduciary responsibility for the plan. What does this mean? You are going to act in good faith to administer the plan. A hired financial advisor cannot assume this responsibility for you. The plan administrator creates the plan documents, completes annual audits, and prepares annual filings. The platform provider is the custodian of the financial assets and contributions. The platform provider maintains financial statements, updates them online multiple times per hour, and distributes summary statements to investors monthly.

Many dentists choose to hire a professional financial advisor/manager who helps participants select funds, provides investment education, and also acts as the plan administrator, shouldering the documentation and audit work that dentists and their office managers rarely want to do themselves. But some 401K providers have made these tasks easy to accomplish with automation – a robust plan can be designed and administered in as little as 15 minutes.

IN PART 2 OF THIS SERIES…I will present three additional 401k myths that are relevant to dentists as small business owners.

Related Resources:

• Dispelling Myths Associated with 401k Retirement Plan Fees – Restorative Nation
• (14) Pankey Webinar: Essential Business Systems for Every Dental Practice – YouTube

Additionally, you can take a Finacial Management course with me. Essentials 2 will help you reach your goal of financial freedom by gaining the tools you need to get there. Develop philosophical-based fee schedules and continue to deepen your knowledge of investment strategies and debt management.       

Stocks and bonds have both fallen in 2022, taking down portfolio balances. Meanwhile, inflation has shot up, tying the hands of many investors—retirees and others, who might otherwise be inclined to reduce spending in periods when our portfolios have lost money.

What Can We Control?

As long-term investors, some of us have experienced these moments before. One of the best ways to minimize worry in a volatile, uncertain market environment is to focus on what we can control.

What we can control is:

• our savings rate,
• our spending plan, and
• our spending rate

In retirement, the spending rate is often referred to as the burn rate.

We can use all three of these levers throughout our lives. Often, these levers influence long-term outcomes more than investment selection or even asset allocation. These three levers are often the main determinant of whether our plan sinks or swims.

We Can Invest More

Increasing our savings rate in down markets allows us an opportunity to invest more when markets are off 10%, 20%, 30%, or more. The process of buying more shares at a lower price point weekly, bi-monthly, or monthly allows us to lower our average cost per share. (This is Dr. L. D. Pankey’s Rule of “7’s” in A Philosophy of the Practice of Dentistry.)

Many investors in accumulation mode prioritize “maxing out” their contributions to tax-sheltered retirement savings vehicles—IRAs, 401(k)s, and more recently, health savings accounts. Yet another type of tax-advantaged contribution has been seeing an increased uptake: after-tax 401(K) contributions.

My recommendation is that you talk seriously with your business accountant to determine if your current business cash flow will support more contributions to your retirement plan, savings, and/or possible after-tax investments.

Consider After-Tax 401(k) Contributions

If there is a knock against after-tax 401(k) plans, it is that many people who have access to them are not using them! They have much to offer.

Plans that offer after-tax contributions, allow investors to stash a full $61,000 in a 401(k) ($67,500 for people over 50), including pretax or Roth contributions, employer matching funds, and after-tax 401(k) contributions.

Assuming the 401(k) is a high-quality one, after-tax contributions tend to beat investing in a taxable brokerage account on an after-tax basis. That’s especially true if the plan offers automatic in-plan conversions. These plans are especially appropriate for high-income, heavy savers, who have access to them.

Required Minimum Distributions Can Be Reinvested in an After-Tax Account

For those already retired, our main lever for the health of our plan is how much we withdraw from our portfolio. If we can find a way to take a bit less when our portfolio is down, we will leave more of our portfolio in place to recover when the market goes back up. One question that inevitably crops up in the realm of portfolio withdrawals is the role of required minimum distributions (RMD’s) and whether they could cause us to prematurely deplete our assets.

The short answer is no! It is always appropriate to evaluate the amount of the RMD, and realize we are not required to spend it all. We can reinvest it in an after-tax  investment account and/or increase our Emergency Fund, as a cushion for future unknown events of which persistent inflation could be one example.

Take a Long-Term Perspective

Focusing on what we can control—especially our savings and spending rate, can provide peace of mind in volatile times, and so can taking a long-term view. Learning more about the history of the stock market and the detailed history of stock market declines, broadens our understanding and can minimize the noise.

The dominant long-term trend is up, and the periodic bear markets, even bad ones like 2007-2009, have been fairly modest blips along the way. It can be easy to lose sight of that long-term view when the market logs one bad day after another.

It is worth training our gaze on the long-term and what we can control by:

• living on less than we make,
• saving a greater percentage of our compensation, and
• becoming more aware of controlling our spending plan and burn rate

To learn more about personal finance, I invite you to sign up for the Pankey Institute course titled Creating More Financial Freedom which will be held March 30 – April 1, 2023.

The Consumer Price Index (CPI) is a measure of the average change over time in the prices paid by urban consumers for a market basket of consumer goods and services.

Comments by the Fed – FMOC: Suggest the Fed is trying to gently convince their adoring public that inflation may actually turn out to be “a little stronger than they forecast for a little longer than they forecast.”

Grant Williams’ notes in Things That Make You Go Hmmm:

We may be facing demand-driven inflation as a consequence of misguided monetary policy and misdirected fiscal stimulus. Monetary stimulus had some effect, of course, and the latest growth forecasts suggest, it is already dissipating. The Fed has done so much, so fast, it produced a self-limiting recovery in which supply – chain inflation (caused by all the container ships anchored / waiting in Los Angeles / Long Beach) tend to cap potential growth. The trucking industry may also be a part of the log-jam, backing up deliveries.

5.9% Announcement by Social Security

That is the increase that retirees receiving Social Security will pick up next year to account for inflation. It is the biggest jump in 39 years and captures what consumers have been feeling acutely over the past year: Stuff is getting more expensive.

The fact that Social Security payouts will reflect higher costs is certainly a plus for that portion of retirees’ income streams. Inflation may prove fleeting, a short-term blip resulting from pent-up pandemic demand and snarled supply chains, or it could persist. Or, it could be that the medical premium portion of Social Security could be increased and consume much of the 5.9% announced increase. No one has said much yet, other than the increase of 5.9%.

Dentist’s and Retirees Take Note

I believe all dentists and retirees can learn to think about inflation more individually and holistically. We can start with taking stock of our own rate of inflation, which is not a standard CPI. We can look at the details of our Personal Spending Plans (Budgets); a function of what we spend our money on and how much inflation we are seeing in those outlays. Inflation considerations also extend to our portfolio; think about our withdrawal or “burn” rate, if retired, as well as what kind of inflation protection to embed in our portfolio’s. (more on this below)

We can also look at, and think about inflation today, examine our own personal inflation rate, and safeguard against inflation’s corrosive effect on our investments and our Economic Engine. For most dentist’s, our Economic Engine is our dental practice. We can study our line items on our Profit and Loss Statements and/or our Management Income Statements (MIS), year-over-year or twelve month roll, looking for inflation creep in line items like; consumable dental supplies, laboratory costs, salary and benefits (hygiene, clinical, and administrative teams), occupancy total costs, administrative supplies and services, notice the rise in dental equipment cost (replacement costs), along with financing costs. All of the above will combine into our Personal CPI, which may well require an adjustment in our dental fees.

Calculating Our Own

As we collect our personal and practice inflation data, be willing to ask a question; what are we discovering? If looking at the FOMC CPI weightings and they look nothing like our own, when considering our increased household and practice spending, we are most likely on the right track. Our outlays for housing may diverge significantly from the CPI percentages, especially if we live in a paid-off home. We will still have costs for upkeep, insurance, and property taxes, which are also included in Housing Costs.

By doing the above exercises, we can learn to tweak inflation expectations, pro-actively while attempting to keep then in-line for each of line items, and incorporating our own experiences and discoveries. At the same time, it is important to not come away with a false sense of precision with respect to inflation. For one thing, inflation statistics can vary by section of our country, state, and even town by town. Moreover, a number that can bear paying attention, is the trend in our actual, all-in spending, which depends on a few key variables: our fixed and discretionary expenses, as well as, what is going on with inflation in each of the spending categories. Ultimately, our aggregate household and practice spending trend matters more because we exert a level of control over some of our spending, where the overall inflation rate is out of our hands.

Early Retirement

Is early retirement is on your radar? Data suggests that the case for a growing share of workers, inflation protection is an even bigger hurdle. That is because we will be using our retirement dollars, and spending them over a longer time horizon, when starting early. This increases the odds that inflation could flare up sometime during our drawdown period: pay attention to withdrawal rates, portfolio construction, and Social Security adjustments.

Investment returns over the next decade might not be so great, some experts warn. Be prepared to rein in our spending in case a lousy market materializes. A threat of experiencing big portfolio losses early on in retirement, when our portfolio value is at its highest, is one of the key threats to the durability of any retirement plan. And sequencing risk looms particularly large in environments like the current one, when bond yields are low and equity valuations are on the high side. If market returns are indeed lower than our two decade averages, in the first few years of retirement, our best defense is to cut our spending. For younger dentists reading this a lesson to be learned is “keep shoveling it in” and increase the percentage of present income earmarked for saving and investment; over time, through compounding, this will ease your worries and provide a greater measure of choice in financial decision making.

What we may want to discussed, in this context, is the other side of the same coin. Yes, today’s retirees can become more conservative on the withdrawal rate, and use a safer withdrawal rate closer to 3% than 4%. What may matter more is the dollar amount we can pull out, not the percentage. Thanks to elevated portfolio balances, a 3% withdrawal of a larger portfolio may translate into a withdrawal that is every bit as large as 4% on that same portfolio ten years ago. In addition to balances being larger, retirees can enlarge their lifetime portfolio withdrawals by employing a flexible withdrawal approach rather than taking fixed amount withdrawals; helping to reduce portfolio demands and a requirement for bonds with minuscule yields.

It is good to remember to continue to use and learn from the Financial Tools, which have always been available to us: Personal Spending Plan, Personal Net Worth Statement, Potential Cash Flow Analysis from All Cash Flow Streams (Dental Practice, Tax-Deferred Portfolio, Personal After-Tax Portfolio, Investment Real Estate, and other holdings. It is a good thing most of us have been given enough years to layer our financial learning, with intention!

Keep a Moving Target Orientation!

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