Don’t Let These Risks Threaten Your Savings
You’ve worked long and hard to accumulate your nest egg, and it has grown to a size that would be difficult, if not impossible, to replace. From market drops to lawsuits, there are many risks that can threaten your savings. What steps can you take today to reduce your risk and protect your wealth in the future? Following are four common financial risks faced by dentists and strategies for helping you overcome them.
Threat #1 – Running out of money in retirement
Solution – Establish a financial plan and stick to it.
One of the best ways to avoid running out of money early is to have an accurate estimate of how much you will need in retirement and a financial plan to get you there. If you own your own practice, you’ll need to incorporate a succession plan to help you prepare for transitioning to retirement. Your plan and transition strategy should account for multiple retirement scenarios and various factors that have the potential to impact your future. This process can give you an idea about how much you should be saving prior to retirement in order to achieve your goals. Specific considerations include, but are not limited to:
- How much you plan to spend each month
- Fluctuations in the market
- Impact of inflation on spending power over time
- Required minimum distribution (RMD) requirements
- When to begin taking Social Security
- Whether or not to pay off your home
- Whether or not to purchase a vacation home
- How much you may receive from selling your practice
If you are about to retire, or have already retired, a solid plan can help you live with the confidence of knowing you have accounted for the major factors that may impact your retirement, and that you have built in buffers to account for unexpected events. The ultimate value in having a plan is being able to sleep well at night, knowing that you (and your family) are financially prepared.
Threat #2 – A sudden market drop
Solution – Develop a diversified investment portfolio with appropriate strategies.
The dot-com bubble of the early 2000s crushed many investors’ portfolios. It took approximately 10 years for investments in large U.S. companies to recover and 15 years for technology companies to recover. This time period is sometimes referred to as the “Lost Decade.”
However, not all areas of the U.S. markets were down. During the same time period, medium-sized U.S. companies grew by 6.36%, small-sized companies grew by 6.35%, emerging markets grew by 9.78% and bonds grew 6.3%. Investors with diversified portfolios had the potential to experience significant growth during the Lost Decade.
What about more recently? Haven’t U.S. investments outpaced international investments for a long time? Not exactly. In 2017, following the presidential election, the United States experienced an excellent market gain of 21.83%. However, emerging international markets were up 36.83% during the same time period. Maintaining a diversified portfolio that invests in more than just large U.S. companies can play a vital role in protecting and growing your long-term assets.
What if you own just a high-performing stock like Apple or Tesla? While it’s true that these companies have experienced stellar stock performance, no one knows how long this performance will last. An example is GE, which used to be known as the “stock to own”, yet it no longer holds a position in the S&P 500. ExxonMobil was another so called “can’t lose” stock that was recently taken off the Dow Jones. What will happen to Apple and Tesla? No one knows. Is the future of these companies worth betting your nest egg on? If the answer is no, consider diversifying.
Threat #3 – Losing control of your assets
Solution – Have estate planning documents in place before you need them.
No one enjoys planning for the worst-case scenario, but it’s vital to do so in order to protect your assets for yourself and your loved ones. Putting in place the necessary documents today can save your family from financial and emotional hardship in the future.
Begin with durable financial and healthcare powers of attorney to outline a plan for medical emergencies, cognitive decline or other situations where you are unable to make decisions. Without such documents in place, state laws can dictate who has the right to make medical decisions on your behalf. Also, if a family member needs to access your financial accounts to pay for medical expenses, it may be difficult to do so without prior permission.
Another challenge can arise if you pass away with no will or trust in place. In such a case, your estate may be subject to the state’s rules about how your assets are distributed, which may not be in line with your own wishes. In addition, the probate process can be time consuming and costly for your loved ones.
In many jurisdictions, wills are considered public record, meaning that anyone can see who was designated as an heir in your will. Distant family members and “friends” may come out of the woodwork to solicit your beneficiaries. At the very least, this can cause your family to be bombarded with advertisements from companies trying to sell their services. Proper estate planning can protect your privacy and the privacy of your loved ones.
Threat #4 – An accident or legal action
Solution – Have appropriate insurance and legal documents in place.
Let’s say your investments are appropriately positioned and doing well. Your retirement is on track. Then something unexpected occurs and you are being sued. Are your investments at risk? They may be if you don’t have the appropriate insurance in place to protect yourself. Consider implementing the following:
Umbrella – An umbrella policy provides additional protection above and beyond your homeowners and auto insurance. An umbrella policy may kick in if you have a car accident or an accident at your practice. Umbrella policies can provide $1 million to tens of millions of dollars in coverage.
Malpractice – Dental malpractice insurance provides legal liability coverage, including payment of malpractice judgements, settlements, court costs and legal fees. Whether you’re covered by an individual policy or your employer provides malpractice insurance on your behalf, make sure you understand your coverage and the specific protections it provides. There are two main types of malpractice policies:
- Occurrence policies provide coverage for any claims filed against you during the time the policy was in effect, even after the policy has expired or you have retired.
- Claims-made policies provide coverage for a shorter period of time, typically one-to-five years after you performed a procedure. These policies are typically less expensive than occurrence policies but do not provide coverage once you have terminated your employment.
Life – Life insurance is important because it provides financial protection for your loved ones should you die unexpectedly. It’s one of those things no one likes to think about, but it’s critical that you have the appropriate policy in place to support your family.
Disability – Disability insurance provides you with income should you be unable to work due to injury or illness. In a specialized field such as dentistry, it’s important to have an “own occupant” policy to ensure you receive a benefit if you can no longer perform the functions of your job. This type of policy will allow you to continue supporting your family. If you own your own practice, your policy benefit can also provide an income stream to help cover overhead expenses while you work through your succession plan.
Workers’ compensation – Workers’ compensation policies provide employees with lost wages if they become injured while performing their duties at your dental office. These policies are mandatory in all 50 states. The cost of this coverage is based on the dollar amount of your payroll.
Facility – If you plan to own or become a partner in a dental practice, you will likely have a lot of expensive equipment and supplies. Facility insurance covers the replacement costs of equipment and supplies should they be damaged by fire, flooding or other unexpected circumstances. The cost of facility insurance depends on whether you own or lease your office space and how much equipment you need to insure.
Office overhead – Office overhead insurance covers your monthly expenses should you be unable to work due to injury or illness. This coverage is typically less expensive than disability insurance and pays for monthly expenses such supplies, equipment loans, rent/mortgage, etc.
While these strategies provide a starting point, there are many other ways to protect your wealth that may be more applicable to your specific financial situation. At Creative Planning, we deliver a team of credentialed, educated, experienced and action-oriented advisors, including CERTIFIED FINANCIAL PLANNER™ practitioners, certified public accountants, insurance specialists, attorneys and other professionals dedicated to helping you achieve your goals. If you’d like to begin the process of building your financial plan, please schedule a call.
