by Roger P. Levin, DDS, MBA; and Michael C. Smith, CFP, MBA
Keeping too tight a grip on your money can hurt your bottom line
While most Americans do not generate enough income save too much, there are professionals, including orthodontists, who are engaging in this practice. The financial implications of saving too much can be classified into three categories: working too long, estate tax consequences, and asset protection.
Working Too Long
During a recent dinner, one orthodontist summed up his thoughts on the ideal time to retire. He said he would retire as soon as he was sure that he had enough money to live on for the rest of his life. Upon further examination, he had no idea how much money that was or how long he could expect a given sum to last. It is almost certain that he will end up working far longer than he needs to—and he indicated that he is not ecstatic when the alarm clock goes off in the morning.
A financial plan that gives a serious examination of retirement goals could help this dinner guest determine what is achievable versus what is just nice to think about. He may actually be able to work fewer years and spend time engaged in life interests and hobbies. If this individual does not know where he is financially, how can he know where he is going or when he will get there?
Estate Tax Consequences
While you are working, your income gets taxed at a relatively high federal rate. Any excess income gets saved or invested, and the dividends, interest, and capital gains are all taxed again. If you have your practice organized as a certain type of corporation, you pay both corporate and personal taxes. This does not include sales taxes, excise taxes, user fees (thinly disguised taxes), property taxes, or state and local income taxes. It is probably safe to say that orthodontists are some of the most highly taxed people in the country, and it does not stop when you die.
Death is a taxable event in many cases. In 2004, an individual who leaves a gross estate in excess of $1.5 million is subject to the estate tax, and the top tax rate is 48%. Transferring assets to a spouse is tax-free, but it increases the estate of the surviving spouse. So, if you build a net worth of $6 million, your heirs could owe the IRS more than $2 million after your death. Life insurance, which is usually received income tax-free, is also included in your estate unless significant financial planning takes place. This means that a $1 million life insurance policy could yield only $500,000 to your family. These problems are much better problems to have than many others, but they are serious issues that you should address in your financial plan.
Another area that should concern high-income earners and those who have accumulated personal wealth is asset protection. We have all heard stories, on occasion, of minor grievances that go to litigation and produce large, unwarranted awards. A skilled attorney and a certified financial planner can design the right asset-protection strategies for you and your family. They include simple strategies, such as making sure all your insurance coverages are adequate, as well as more detailed ones involving asset-titling changes and various trust arrangements. A team approach that considers protection of your assets is invaluable. You have worked very hard to achieve your level of success. Therefore, it is important to protect and preserve your wealth rather than have an instance of bad luck, poor timing, or some other unplanned incident erode years of saving and preparation for retirement.
In summary, saving too much is a pitfall that should be avoided, because it can delay your financial independence by years. To achieve financial independence at an early age, orthodontists should pay off educational debts as soon as possible, start a disciplined saving regimen early in their careers, and consult a certified financial planner to devise a plan for a lifetime of financial freedom and success. Even highly successful orthodontists should consult a financial expert to avoid pitfalls that could negatively affect their long-time financial health.
Roger P. Levin, DDS, MBA, is the founder and CEOof Levin Group. A consultant for more than 20 years, he has published more than 2,700 articles and 49 books, and addresses more than 22,000 dentists each year. He can be reached at (888) 973-0000 or [email protected].
Michael C. Smith, CFP, MBA, is vice president of Levin Financial Services, Inc. He can be reached via email at [email protected].
This article does not constitute legal or tax advice, nor is it intended to provide specific investment advice. Consult your legal, tax, and financial advisors if you have questions.