This article was originally published in The Progressive Dentist.
If “all the world’s a stage,” and we each have our exits and entrances as Shakespeare proposed in As You Like It, then family-based investing might be compared to a three-part production.
Act One: We are young dentists with much to learn, but time is on our side. Our definition of financial “success” is usually vague.
Act Two: The spotlight shifts to a mid-life role. We’re typically at the peak of our ability to produce top quality dentistry while our investment horizon shortens. We have thought about what it will take to achieve financial independence and sought advice to pursue our goals.
Act Three: Our central focus shifts again as we are ready to sell our practice and enter retirement. We’ve achieved financial independence; we now require specialized expertise on how to move from accumulation to withdrawal and wealth transfer.
Of course, transition from one act to the next across your own dental career is rarely so consistent or obvious. But, it can be helpful to consider some of the challenges and opportunities you typically encounter along the way, as you seek to build a multigenerational wealth strategy to span your immediate or extended family’s long-term goals.
- What are some of the characteristics for each act in your own investment performance?
- How do they impact individual investment decisions?
- How can family discussions and planning maximize efficient wealth accumulation, enhancement and transfer among and across generations?
I want to address these questions as we focus on investing across your own lifespan as well as in preparation for wealth transfer to future generations.
Act One: The Young Dentist
Setting the Stage
The biggest advantage of youthful saving and investing is being able to maximize the “snowball” effect of compound interest during your long investment horizon — the ability to earn on your reinvested earnings.
For example, consider two investors…
When “Sally” graduates from dental school at 26 years old, she begins saving $5,000 annually for 10 years. By 35, she has set aside $50,000. “Sam” waits until he’s purchased a practice and paid off his loan to begin saving at age 35. He then saves $5,000 annually for 30 years, or $150,000.
Yet when both dentists reach 65, if we assume that they’ve both been earning a hypothetical 7 percent annualized return on their savings (including compounding), Sally’s portfolio is worth $563,000 versus $505,000 for Sam’s.
Because Sally let compounding begin its work earlier and go on for longer, she generated a slightly larger portfolio in the end, even though she set aside a substantially smaller nest egg in the beginning.
Good for Sally. But let’s acknowledge that saving when you are young is difficult. Earned income is often minimal. Paying off dental school loans, purchasing a first home, starting a family — these and other more immediate goals make it difficult to set aside funds reserved for future wealth.
In addition, a clear understanding of how to build wealth may not yet have formed. For example, only eight states currently require their high schools to offer financial literacy courses. Education at home can be equally lacking.
A University of Michigan survey found that money was the second biggest topic for teenage/parent disagreements. There also has been considerable misinformation in the popular press. The latest flashy trend or hot stock tip seems to receive far more attention than less “newsworthy” discussions related to building and maintaining robust portfolios using time-tested, academically based tenets of Modern Portfolio Theory.
Be heartened that taking a few small but regular steps early on can still make a significant difference over the long-run.
- Become better educated. Read simple but essential investment strategy books, such as The Investment Answer by Daniel Goldie and Gordon Murray, or any of Larry Swedroe’s books. Seek the advice of a fee-only wealth advisor who is knowledgeable in dentistry and who will help you build and maintain a sensible, low-cost portfolio as described in these books.
- Develop a plan. Determine how much you expect to save each month. By saving first and then spending what’s left, you’re less likely to miss what you’re setting aside. As part of your spending budget, include a cushion for emergencies, so your savings aren’t depleted by the inevitable unforeseen circumstances.
- Start saving. Find expenses you can eliminate. If you receive “found money” (tax returns, gifts, bonuses) save at least a portion. Familiarize yourself with IRAs and retirement plans and take maximum advantage of them. As described above, the rewards of starting young, even with modest amounts, are not to be underestimated!
- Move from saving to diversified, low-cost investing. Investments are expected to earn more than savings and more than inflation, but you also risk losing some or all of your money. Diversification is a key ingredient to help minimize (not eliminate) the risk involved. Keeping costs low also helps maximize expected returns.
- Plan as a family. Participate in family meetings to discuss generational wealth strategies (as described further in acts two and three).
Act Two: The Mid-Life Dentist
Setting the Stage
Particularly if you (and/or your spouse or partner) have managed to invest during your early years, act two of your investment performance should give your family portfolio a chance to shine. Your investment horizon remains relatively long. Your capacity for earned income grows.
Wealth from parents, grandparents or other family members may be transitioning to you for stewardship. You may have increased opportunities to invest in a retirement plan for your practice as well as increased access to investment or wealth advisors.
By now, you’ve probably selected your personal measurement of financial independence:
what your portfolio size needs to be for you to feel like you could stop working whenever you wish, and still achieve your and your family’s objectives.
Time. That sums it up. As the sandwich generation, you may find your time and energy squeezed among at least children and parents, if not an extended family, maintaining a successful practice, and philanthropic or community responsibilities.
If you are accustomed to your spouse managing the family wealth while you focus on your practice, you may be unsure how to proceed if you are required to assume that role too.
Again, take it step at a time, as you would when implementing an overall treatment plan for a patient in need of extensive care.
- Continue or start an investment plan. If you already have a written investment policy, you’re one step ahead. But do revisit it periodically to ensure it still reflects your long-term goals and appropriate risk tolerances (your ability, need and willingness for investment risk in your portfolio).
- Continue or start to invest. You’ll be better off if you’ve been saving and investing all along, but if you’ve not yet been able to, the sooner the better. If possible, work with an investment advisor as described above. He or she also can ensure that your assets are allocated for proper diversification and located for maximum tax efficiency.
- Initiate estate planning. If you wish to transition your wealth to future generations and/or leave a charitable legacy, seek counsel to help you begin preparing tools such as trusts, wills, living wills and durable powers of attorney to reflect your goals.
- Initiate risk management planning. Risk management tools can bridge the gap between your current wealth and how much you would need if unforeseen circumstances prevented you from achieving your goals. Whether your needs are modest or extensive, a qualified wealth strategist can help you analyze that gap, and implement the right tools for the job.
- Initiate vital dialogue. The Rockefellers do it. So do the Hearsts and the New York Times’ Sulzberger family. Regular, carefully planned family meetings can move your wealth strategies beyond your immediate investment horizon and into the higher level of tax- and investment efficiency made possible with multigenerational planning.
Act Three: The Retiring Dentist
Setting the Stage
You have now reached your personal goals for financial independence and are ready to retire. That does not mean your journey is ended; it is merely shifting to new directions where your opportunities broaden.
Even measured globally, we are all on average living healthier, longer, more affluent lives than previous generations. In The Birth of Plenty, William Bernstein describes how worldwide quality of life has improved during the past 50 years by almost any measure: life expectancy, GDP, literacy, infant mortality and educational levels.
Of course all roads have their rough spots, and the road into retirement is no exception. Many traditional benefit systems (Social Security, Medicare and pension plans) are eroding, even as health care and long-term care demands and costs are on the rise.
Broad economic trends aside, you also face entirely new challenges within your investment portfolio. You may be an expert by now at putting assets in. But are you prepared to begin taking them out?
- Plan for your retirement. As you approach retirement, consult with your wealth advisor on how and when you hope to achieve your financial independence. You can use initial and ongoing Monte Carlo analysis to help you form and maintain realistic goals. As your goals shift, your portfolio allocation may also need to be reconsidered, potentially tilted toward protecting your assets rather than amassing more.
- Plan for efficient wealth transfer. If your wealth is divided among generations within your family, ensure that each portfolio is allocated properly for each generation’s risk tolerances. If you transfer wealth from one generation to the next, ensure allocations shift accordingly and tax-deferred accounts are handled properly. Similarly, to maximize the value and efficiency of your charitable gifts, the timing, amount and method of donation should be carefully planned.
- Revisit risk management options. Upon achieving financial independence, your risk management needs shift from filling the gap of potential lost income to playing a key role in protecting against excessive withdrawal, estate tax management and related concerns.
- Finalize and share your wealth transfer objectives. It is conservatively estimated that over $40 trillion of wealth transfer is expected by 2052. It is important to prepare for it — and to share your preparations as appropriate. When openly discussed, estate planning and risk management can make it easier for beneficiaries to form their own plans, help maximize tax efficiency during wealth transfer, and help protect hard-earned wealth while fostering your own worry-free retirement.
- Share your history and your values along with your wealth. Countless sources agree on this key ingredient shared by thriving families and organizations. As described by James E. Hughes Jr. in his book, Family Wealth,
“Family stories are the glue that binds together individual family members. Every family I know that is successfully preserving its wealth sets aside time at its family gatherings for the sharing of its unique history. Both young and old tell the stories and in this way discover their common bonds and values.”
The Play’s the Thing
If there was one thing Shakespeare loved most, it was a good family intrigue. For your own aspirations, you probably seek far less drama and a much smoother generational transition than, say, Hamlet was forced to endure.
Save according to your abilities, as early and often as possible. Invest for the long-term by sticking to a personalized plan according to the academic evidence on how markets deliver their expected returns.
Plan for the future you want to achieve, and communicate your goals regularly among the generations involved.
By acting in these ways — slowly but surely, deliberately and consistently across the stages of your life —you can best avoid the theatrics and leave yourself more time to enjoy the play.