The most frequent question dentists of a certain age ask me as their financial planner is “When can I afford to retire? As you would expect there is not usually a quick answer to this question.
Financial Planning
Most dentists are so busy working on their practice that they have not had the time or the guidance to sit back and actually consider what they wish to do with the rest of their lives.
By this, I do not mean just mean from a work perspective but also family, travel, hobbies, a change of direction or pace of life. The key to deciding when to retire and sell your practice is long term financial planning rather than hoping for the best.
Proper financial planning means looking at everything you want to do for the rest of your life and finding out if you will run out of money before you die. Simply put, by using financial planning software we can analyse your likely income from pensions or other investments and assets versus your expenditure year by year until age 100 and assess the impact of retiring and selling your practice now or in 2 years, 5 years etc.
Case Study
A new dental client I met at a seminar, aged 58, really ( and I mean really!) wanted to retire but was nervous that he would suffer financially because of the loss of income and reduction in his NHS pension if he took the lump sum and income early. He and his wife were shareholders and had been taking dividends.
Using financial planning software, we projected forward their expenditure including key aspirations like buying a new car, taking the family to New Zealand, increased annual holidays for a few years and paying for 2 daughters weddings. We then projected forward their income from the sale of the practice, investments, taking his NHS pension at 58 or 60 and income from personal pensions given new proposed pension rules announced in the budget. The planning confirmed that if they sold the practice now and did not take his pension from the NHS until age 60 ( to avoid actuarial reduction) and still did everything they wanted to do for the rest of their lives, they would not run out of money.
Waiting until age 60 to take his NHS pension would increase his pension by an extra £5k per annum as well as increasing the lump sum ( because early retirement factors would not be a feature) and extracting some of sales proceeds from the company as dividends ( following accountant advice) would meet their income needs for the next 2 years.
We were also able to consider making a further contribution into the wife’s personal pension. She would receive tax relief and because of the proposed change in pension rules she should be able to draw all of her fund from the pension pot tax free over a several years by using the Pension Commencement Lump Sum ( tax free lump sum ) initially and her Personal Allowance each year.
It also identified a potential IHT problem and this was an area we could start planning for in the future. This gave them confidence and peace of mind to make their decision and they are currently playing golf in Portugal having just returned from New Zealand and bought a new car.
The planning though covers much more than this as it focuses on:-
- Estate planning
- The risk you are taking with existing investments
- What return you need from future investments and thus the risk, if any, you need to take
- Do you have enough or need life cover to ensure the survivor can still live the life they want if their partner dies prematurely
- How efficiently is your income split (where possible) for income tax purposes
- Examine “what ifs” e.g. what if you gave away some money now to the children or worked for an extra year or delayed taking your pension
Most people will intuitively know if they can afford to retire or not but financial planning confirms or reinforces this giving you peace of mind.
So when is the best time to start your financial plan?
Well, the answer of course is now, because if you think about it you should not be making any financial decision today unless you know that it is going to help you achieve your financial goals in the future.
Having that plan in place now will significantly assist you in deciding when you can retire.
If you would like to find out more about how I can help you with financial planning, please contact me at brendan@essentialmoney.co.uk to arrange an initial exploratory meeting at my expense.
GUEST CONTRIBUTION FROM ESSENTIAL MONEY: Brendan Coburn is based at Essential Money in Birmingham and specialises in Financial Planning and providing Independent Financial Advice.
You can contact Brendan Coburn at 0121 685 5060 or email brendan@essentialmoney.co.uk