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Is there a “right way” to pay your family members through your business? When is it the right time to hire a financial advisor? Should I start a private practice? All three of these questions have something in common. They’re the topics discussed on this Q&A episode of Dentist Money™. Reese and Ryan give their advice on what tax saving vehicles to use when paying kids; they discuss the right timing for hiring a financial advisor; plus they share their reasons why opening a private practice isn’t necessarily the right choice for every dentist.
Reese Harper: Welcome to the Dentist Money™ Show, where we help dentists make smart financial decision. I’m your host, Reese Harper, here with my trusty old co-host, Sir Ryan Isaac.
Ryan Isaac: Also known as gator.
Reese Harper: Yeah, you’d like to be know as gator, but we’re not letting you have a new nickname anymore.
Ryan Isaac: Actually, we talked about this, and can I suggest one? So the guys upstairs said “Capital Gainz,” but “gains” with a z, the workout reference. Could I be know as “Capital Gainz?”
Reese Harper: (laughs) if you pick your own nickname that you want to be called–
Ryan Isaac: No, they chose it for me.
Reese Harper: Does that actually count? No.
Ryan Isaac: It’s called self-glossing, you can’t self-gloss. But I loved it! It’s very financial and gym appropriate.
Reese Harper: Let’s see if it sticks based on whether you promote it, or it’s natural and organic.
Ryan Isaac: Oh, I’m going to slip it in there.
Reese Harper: I was just thinking about the episode of Seinfeld where George wants to give himself the nickname of “T-Bone” (laughs) and by the end, it’s “Coco.” It’s gonna backfire dude, don’t push too hard. Let it evolve; if it happens it happens. Let the universe come to you, dude.
Ryan Isaac: It did! In the name of– actually, do you know what’s funny? I called one of our clients the other day for a phone meeting we had, and the office manager picked up, I told her who I was, and she said, “oh is this Sir?” The office manager! I was like, “oh, that’s awesome.”
Reese Harper: Oh no, how did that happen? Well done. Well, today is an episode that is quickly becoming one of the favorite episodes we do, which is the Q&A episode, where we take all the questions that have come in from the last month, or few weeks basically… I don’t know when the last one we did was. Did we do one a month ago?
Ryan Isaac: Yeah, they’re happening monthly. Time’s flying by when you’re having fun!
Reese Harper: We had to filter down a little bit, and we picked the ones that we feel like are the most applicable, and so shout out to everyone for sending in your Q&A questions. We really appreciate it.
Ryan Isaac: Cue, where do they send questions?
Reese Harper: Yeah, on the website, dentistadvisors.com, if you go to the “Podcast” page, there’s a big button that says “Submit Question to Podcast,” and it makes it really easy just to submit a quick form with your question.
Ryan Isaac: Great, we love it! Send them. And, if you want to vote on my nickname, I’m just saying…
Reese Harper: Yeah, we’ll definitely have that quiz up there.
Ryan Isaac: Yeah, the quiz is coming (laughs). Alright, question number one. This is a pretty common question, especially around tax time, for those of you with children. The question comes from an orthodontist in the midwest; thank you midwest orthodontist. How do I know the difference between a Roth for kids versus paying for their education directly, versus a 529 or other options? So it’s basically, “if I want to pay my kids…” there are two parts of this question.
Reese Harper: Wait wait, what did he say? Did he ask at the beginning if he wants to pay his kids? What did he say at the beginning about paying?
Ryan Isaac: “How do I know the difference?” It’s more, “where do I put the money when I pay my kids?”
Reese Harper: Okay, so there’s an assumption he’s saying, “I’m already paying my kids, I just want to know where I put the money that I’m paying them.”
Ryan Isaac: Yeah. Roth versus paying the education, the schools directly, or a 529.
Reese Harper: The right answer is: ask the person you’re paying what they want to do with the money, because you can’t make that decision for them since it’s their money that you paid them. I mean let’s just get this straight. There’s a fine line here, alright, between–
Ryan Isaac: You can not circumvent tax laws by taking a tax break, paying your kids, and then paying the money from them for personal expenses.
Reese Harper: Yeah, like, this is a grey area, folks! And I was just at a conference recently where I heard someone advocating for– you can easily pay your children the maximum amount of the standard deduction, which this year, I think is… what is it?
Ryan Isaac: $12,000. It doubled from last year!
Reese Harper: Yeah, so it’s big! So I heard at a conference recently a CPA say that you could pay this maximum wage base, and then go spend the money to trips on Florida, or whatever. That was basically the takeaway. All I’m saying is like… if you haven’t ever been audited– and for those of us who have been audited, you’re not going to be able to have your CPA be like, “yeah, their four year old is doing a great job at cleaning the office, he pays her $1,000 a month, and of course she uses the money to go on her annual trip to Florida, because that is what that four year old is choosing to do with the money.” I’m not saying don’t pay your kids, because that’s a decision between you and your CPA, okay?
Ryan Isaac: (laughs) and your one year old. “Honey, do you want to get paid $1,000 per month?” She’s like, “da-da. Da-da.” Yes, yeah.
Reese Harper: Do you want to be gainfully employed? I mean, there’s precedent for paying for certain things at certain dollar amount, and probably at your market, that’s different than someone else’s market. You just have to feel comfortable– and I think that’s why we’re spending a little bit of initial time on this. And I’m also going to say that this can be a fairly significant tax savings to be thoughtful about this and actually come up with the right number and the right job description for the right age of person in your family, right? Like, it’s a pretty significant deal if you can come up with the right dollar amount for the right person at the right age in their life, and the right job description… it is a significant savings, and they can use that money for whatever they choose to use it for, it just gets difficult when they are six months old (laughs).
Ryan Isaac: It’s like, every two weeks at the grocery store, you bring the whole family, and, “did everyone bring their UTMA accounts? Does everyone have their debit cards for their UTMA accounts? You’re paying for $200 of groceries, and you’re paying for $200–”
Reese Harper: No, it works! Like, I mean, really the question with a lot of these things is how– it’s the same thing with the home office deduction. It’s the same thing with commute and travel.
Ryan Isaac: In principle, I like the idea of my kids paying their own dang grocery bill; they eat so much food.
Reese Harper: Yeah, I mean they could pay their own rent! You could start charging them rent at an early age; there is nothing wrong with that.
Ryan Isaac: And it just happens to pay for your mortgage. So, here’s the bottom line: before you start paying your kids through your business, talk to your CPA. Not listen to a CPA, or an accountant-type person give a speech to somebody… talk to the guy whose name has to be next to yours on the tax return who will also be held responsible for your decisions; talk to that guy.
Reese Harper: Yeah, because he’s going to be the one that, on your behalf, interacts with the IRS and describes the positions that you took, right? And that’s the reality, that he’s the person who will be your agent in between you and the auditor. And that’s an actual, real thing, okay? And it happens, and you’ll get an auditor assigned to you, and they’ll schedule an appointment, and you’ll have to either show up and talk to them, or they’ll talk to your agent, and if the agent that you work with, your CPA, is uncomfortable with the positions that you’ve been taking, then that audit is not going to go very well. So ultimately, I would say that that’s the first principle of this question.
Ryan Isaac: Okay, that’s the disclaimer. Let’s just assume we’re going to pay kids through the business, and… this is kind of the assumption of this question… you could pay them up to $12,000 dollars this year, per kid–
Reese Harper: Well let’s assume that you are paying– you’ve chosen to pay your kids through the business, because that’s the position you want to take. Because your kids are actually going to do something, and you’re going to be able to justify their wage. We’re not even saying that everyone should even do that… there’s a fair amount of complexity to that choice right there. So, let’s just say that you’ve made that choice.
Ryan Isaac: Okay, so you’ve made the decision to do that. Here’s the question: where do you put the money? I’m going to give you four different places where your money could go. I’m going to start with the most basic, most flexible, easiest place, and we’ll work our way up, and let’s talk about the pros and cons of doing them. For where your kids’ money can go. You’ve got a smile on your face. Are you excited about this?
Reese Harper: Well I’m hoping we start with the ol’ checking account.
Ryan Isaac: Yes! You pay your kids: what are the pros and cons of a checking and savings account?
Reese Harper: Well, I get maximum flexibility, and I have maximum liquidity… it’s also giving me the easiest access to the cash, and it’s more practical. No matter what, in my opinion, you have to have one of these. So, you need to have… for most people, it’s going to be a savings account because you’re too young to even qualify for a checking account with your bank in some cases, but you’re going to have a savings account or a checking account, and that’s going to fund one of many investment accounts that we’re going to go through now.
Ryan Isaac: Let’s go to the next one, which would be a brokerage account. Now, this is like an after-tax brokerage account: it can be in the parent’s name– we have some clients who just open a brokerage account and put money in there that they’ll use for future kids’ stuff– or you can open it in your kid’s name, which is called a UTMA. What are the pros and cons of using a brokerage account for kids’ savings?
Reese Harper: Well, now I have some investment opens: I could actually buy some things.
Ryan Isaac: Oh yeah, that’s the con of using checking and savings: there are no investment options, and their is no tax advantage either. Let’s just mention that. In a brokerage account, you can invest in whatever you want. So now you can teach your kids about investments. Okay, so brokerage account, they’re probably the most flexible option out there for investments, and there are no limits, there are no penalties for moving things in and out. The only– it’s not really a con, but the only thing to mention: there is no favorable tax treatment for you or your kid for putting money into a brokerage account.
Reese Harper: Nope.
Ryan Isaac: Okay. Number three is the mighty Roth IRA.
Reese Harper: Well, when you say that the tax treatment of shifting money from you to your child for doing work and letting them spend it on things you would have already spent it on yourself, that’s the major tax savings.
Ryan Isaac: You’re saying if you put money in a kid’s UTMA and then spend it on family spending.
Reese Harper: Or personal checking account. I mean, the simplest version here is to have them do some gainfully employed labor and put in into a checking account and have them spend it. Make them buy their own school clothes; make them pay their own private tuition for private school; make them pay for their own gas; make them pay for their own movie tickets; make them pay for their own cell phone. My kid is paying for his own cell phone plan. I don’t pay for his own phone, he’s got a crappy flip phone that he hates, and I’m like, “as soon as you want to pay fifty bucks a month for data–” and he’s like, “well I have to mow like four lawns to get fifty dollars!” I’m like, “welcome to my world son!”
Ryan Isaac: Well no, he has to mow like eight because half of it has to be saved; he’s got a 50% savings rate! He needs $100 a month to get that data plan.
Reese Harper: I’m like, “yeah, welcome to the adult life! You have to work ten years, and when you get done with school, you have 700 grand in student loans. That’s life, alright?” That’s the ol’ dental school.
Ryan Isaac: Okay, Roth IRA, what are the pros of a Roth? Now, for your kids to put money in a Roth IRA, they have to be employed, so they have to have earned income to put the money in a Roth IRA. So, a Roth option is only for those who are actually paying their kids through the business. So, what are the pros of a Roth IRA for a kid?
Reese Harper: The Roth IRA allows you to grow your money, obviously, without paying taxes on any of the capital gains or growth when you’re at retirement, but it also has some exceptions that you will be able to pull your money out for–
Ryan Isaac: Surprisingly flexible to pull your own contributions out. And there is a list of exceptions to the rule that you can even pull out gains without penalty in some circumstances, but they’re pretty flexible for your own bases contributions.
Reese Harper: Yeah, and what are those?
Ryan Isaac: What do you mean?
Reese Harper: What are the exceptions?
Ryan Isaac: Oh, I mean, education is one of them. There’s medical, I think there’s house…
Reese Harper: The ones that are most applicable are the first time home purchase, and the school expenses, and medical expenses, and those are fairly generous. And for most people, you could use those by the time you’re 25 years old. So, I think the Roth is probably the most advantageous for a child if you’re trying to find a way for them to fund college, or the first part of their life in kind of the major expenses that are going to come up… Roth’s actually pretty advantageous.
Ryan Isaac: Yeah, it is. The cons to a Roth: there’s annual limits, so if you pay them $12,000 you can’t put all $12,000 in there, there’s a limit of $5,500.
Reese Harper: You mean if they choose to work for you at the rate of $12,000 a year?
Ryan Isaac: (laughs) if you give your six-month-old baby $12,000 a year.
Reese Harper: I’m just saying! There’s a nuance here.
Ryan Isaac: Hey, you took a picture and put it on Facebook for marketing, so…
Reese Harper: It’s their choice to work for you too, by the way, it’s not your choice to force them too, otherwise it invalidates it.
Ryan Isaac: Okay. Last one would be the 529 plan. Every state has kind of a different plan. Some states give slight state tax credits when you contribute to these… but what are the pros of a 529?
Reese Harper: Well for me personally, I get state tax credit, so I want to put at least enough in to get my state tax credit. What that means is, if you put in like 1,000 bucks, you might get $50 back from the state you live in, or if you put in 3 grand, you might get $200 back.
Ryan Isaac: And these vary by state; you’d have to go to your state’s 529 website. And you can use other state’s 529’s too. Some have better reputations than others.
Reese Harper: Most people don’t realize that their state even has a state specific 529 plan. For example, in California, your state specific plan has advantages, and in Utah, my state, the specific plan has advantages to me, and those are mostly on the front end of your contribution. You’re going to get some tax credit, which is different than a deduction. And so, I think you’d want to max that out—
Ryan Isaac: Again, that’s another CPA question too, if you still qualify for the credits. I don’t know if there are phase outs for those credits, I don’t know if that’s changed at all? If there are income phase outs for those tax credits or not?
Reese Harper: Yeah, in some states it’s different than others, right? And it is just going to depend on your income level, because again, this is a state tax credit, not a federal tax credit.
Ryan Isaac: Yeah, and so the downsides to a 529, they are not as flexible, right, in terms of what you can use the money for, they have to be used for qualified education experiences. You can pass them to other kids if one kid doesn’t use it—
Reese Harper: Yeah, a lot of people wonder, though, what that means, and it’s fairly flexible relating to school life. I mean, rent, living expenses, computers, software, tutoring… there is a laundry list of items, and it’s basically—I don’t know which one of our listener’s kids who are going to college wouldn’t be able– I mean, if you’re going to college, you’re going to be able to use it.
Ryan Isaac: There are going to be reasons to use it, yeah. Okay. So, that would be I guess the only downside: it’s just not quite as flexible. I think you could argue too that this is where some states excel above others: some states’ plans don’t have the best investment options. The investment mix inside of there–
Reese Harper: Yeah, that’s a great point. You’re going to have better investment flexibility inside of the UTMA, or the brokerage account, or the Roth IRA then you probably will inside the 529. However, if your state has a low cost indexing option, it’s probably an acceptable choice in order to pick up that tax credit, in my opinion, just because we’re dealing with such small dollars in most cases; those tax credits really add up for people. What’s the general advice you’d give someone if they’re saying, “okay, I’ve got all of these options, what do I do? Which ones am I going to use?” Because you gave a bunch of pros and cons, but if someone says, “hey, I want to put $10,000 away a year for my kids, and I’ve got a nine-year-old, and they are doing some work for me at the office to receive most of that income, and I want to save money for them…” what do you say?
Ryan Isaac: You know, it depends on the amount of money. So if you say it’s $10,000 dollars, that’s a significant amount of money for a kid. You can spread that around to a few different accounts that would be advantageous for different reasons: I would for sure put some in a checking account so they can learn how to spend some money. I like the idea of a Roth; you can still hit that maximum and still have money outside of it leftover. So, you could hit your $5,500 in a Roth, you could put a thousand bucks to your checking account, and then you’d have a couple grand left over for– you could talk to your CPA if you are going to hit the state tax credit for your income and your situation, you could use a 529… I’d probably still just use a brokerage account on it, honestly; I just like the flexibility of a brokerage account. So I’d probably go checking, brokerage, and Roth. Me personally.
Reese Harper: Okay, ask me the same question.
Ryan Isaac: Reese, it’s a ten-year-old kid, and you’re going to pay him $9,000 (laughs).
Reese Harper: Okay, geez. Tricky. The way I’d think about this is (that) I would first back out– here’s the thing about kids’ college–
Ryan Isaac: It’s not fair when you go first, because you can make your answer fancier than mine (laughs).
Reese Harper: Well, you give me a different set of facts and it will be different. So, I’m going to answer this differently so that it’s not going to be repeating the same thing, because I think your opinion is really valid.
Ryan Isaac: Thank you; I needed that.
Reese Harper: I think that most people start funding kids, and they kind of do it all at the same time. It’s like, “time to think about kids!” You don’t usually go, “time to think about one child.” I don’t get clients thinking, “it’s time to think about Tyler’s college, but not Sally’s.” So at the time, you have to look at it and kind of say, “I’ve got a two-year-old, I’ve got a nineteen-year-old, I’ve got a seven-year-old…” You have to look at how much time you have–
Ryan Isaac: You’re going to have kids in your house forever (laughs).
Reese Harper: (laughs) yeah. You have to look at how much time you have between their age now and the time they are going to have to start spending money. And then– for me, this is the simple math of an aging father– I just want to give my kids the same amount of money, so I’m kind of being equal, okay? Being equal, though, doesn’t mean, “let’s put 100 bucks a month away per kid,” because if I do that, and I’m putting 100 bucks away for my three-year-old and I’m putting 100 bucks away for my nine-year-old, I’m going to have different amounts of money by the time that they’re eighteen. So I would just say, “hey, you know what? I want to give everyone $25,000.” That’s my goal. Let’s just say I want to have one year of–
Ryan Isaac: You kind of fund it like a defined benefit plan.
Reese Harper: Yeah. One kind of “college year.” So, I’m going to take my, you know, whatever age they are, and I’m going to divide that by the number of months that I have left before they get to be eighteen, and then I save accordingly. And so, if I were to say how I would fund each kid, it would be based on how much time each kid has until they get to that age, because there is really no point in doing– like, a 529 really doesn’t have a lot of value if I don’t have a long time to get some tax deferral, all it does is complicate my education savings, and if I’m not getting a tax credit, and I’m not getting any deferral, and I’m picking worse investments, then I might not use that. But, in my personal case, I have started fairly young with most of my kids to just give them that minimum amount to get me my state tax credit. It will never be enough to get me to that goal of how much I want to give to each kid, let’s say of the $25,000, because, I mean, my state only allows me to put in like $2,000 a year, right? And I get like a $200 tax credit. And if I’m starting at six, or seven, or eight, which is when I started with my oldest child, I really don’t have quite enough time, or quite enough money, so I end up supplementing the funding with the Roth, and then I don’t usually end up using a brokerage account for my kids, because I started early enough, and I was able to get enough away for them. Like, I’m not trying to put away $200,000 for each of my kids for college. Some people really value that, and if you do, then the only place you’re going to be able to do that effectively is a 529, or a brokerage account. And so, I would say it just depends on the dollar amount. Start with a dollar amount and say how much you want to get away, and then back into the age of the kid and figure out the monthly savings account, and then you can kind of pick your account based on the pros and cons of what we talked about. But, I think it’s an easier way to do college planning, and just get everyone a similar amount of money by the time they get to where you want them to be.
Justin Copier: Do the kids have to earn the money that goes into the 529 the same way they do with the money that goes into checking?
Ryan Isaac: No, and that’s a good question. The Roth, out of all those options, is the only one that they have to have an earned income to have their own Roth account to put money into.
Reese Harper: Alright, we have our second question that came in from… it looks like someone in the army who’s in Hawaii.
Ryan Isaac: Thank you for your service; we love you.
Reese Harper: So, here’s the question: “Hello Reese and Sir Ryan Isaac–”
Ryan Isaac: He meant to say “Capital Gainz.”
Reese Harper: Um… he did not mean that. “I’m a dentist with the army, and I had dental school paid for on an HPSP,” which is a Health Profession Scholarship Program, for those of you who do not know. “I had school paid for on an HPSP contract, and now I’m in my payback time. Most of the young dentists in my profession have come into the service through the same channel. So as military members, we have the option to stay in the service for twenty years in order to retire with a pension; we have free healthcare for our families; we also have access to the TSP,” or the Thrift Savings Plan, for those of you who don’t know–
Ryan Isaac: It’s like the 401k of the military.
Reese Harper: Yeah, or for government employees generally, I think. So, “the TSP, which allows us to invest in a Roth, or traditional IRA, up to about $13,000 a year, as opposed to the lower cap, which practitioners on the civilian side have. These are really unique opportunities, however, our salaries are less, on average, than our civilian counterparts: around $86,000 per year as a captain with regular raises as we accumulate rank and time in service.” He’s basically saying, “so we’re thinking about our options in the army as opposed to separating and going down into private practice.” He’s trying to understand the financial ramifications of each choice. Staying in the military offers stability and security, but separating exposes us to much greater risk and uncertainty, but also offers us the potential for greater financial rewards. “It would be super informative to have your perspective on the financial consequences, or on the finances of a conscientious career, which is the army dentist track. How does that stack up to the finances of a typical, conscientious, private sector dentist, as well as getting a little bit of an insight in how to manage the transition from government service to private practice. Please consider doing a show on these topics.” And… we just did! Or, we’re about to.
Ryan Isaac: Here we go!
Reese Harper: Oh, he also said, “I love tuning into your podcast, and I love your effort in providing such a valuable resource to the profession,” which I really appreciated him saying.
Ryan Isaac: Yeah. We read compliments on air! Twice.
Reese Harper: I don’t always feel like this is appreciated based on the comments we get through Facebook, so I really do appreciate it.
Justin Copier: (laughs) I thought– one of my takeaways is a perk of being in the military is that you get to call everybody else civilians.
Ryan Isaac: Yeah, I loved that, actually. I noticed that.
Reese Harper: (laughs) Yeah, thank you. From one civilian to a captain: we liked that.
Ryan Isaac: Okay, so here are a few things that stood out to me, and then I want to ask you a question, Reese, on where I’d like to take this, and I think we can make this question generally apply to someone in the military who is thinking about staying or going private practice and someone who is coming out of school or who is an associate currently and thinking, “should I just stay as an associate and keep my job, or should I go own a place?” The first few things I would want to point out is that he mentioned that you have the Roth option in the government TSP plan: you can do that yourself in a 401k as well. So you can have a 401k at your office and have the Roth option, which gives access to higher limits, you know?
Reese Harper: This year it’s $16,500.
Ryan Isaac: $18,500.
Reese. Yeah, $18,500, sorry. That’s why you’re in charge as the director today.
Ryan Isaac: Yeah, it’s $18,500, and it’s the same for the TSP unless there is a different provision that made him mention $13,000; I think that was probably just a mistake. So, you can get access to a Roth 401k option in private practice too. I wanted to mention that healthcare is a very expensive cost, and it’s rising a lot every year, but the difference of free health versus the higher income and the asset you can build in private practice isn’t even close over a 25-year career, so I wouldn’t compare those two. Like, free health care balancing out a much higher income and an asset you build under practice.
Reese Harper: What about the pension?
Ryan Isaac: I don’t know how much it is.
Reese Harper: My guess is that it’s going to be at least be 80%-85% of his pre-retirement salary. It’s going to be pretty high.
Ryan Isaac: Yeah, I don’t know how those pensions work. He said you have to give your twenty years, so–
Reese Harper: Let’s make the assumption, because I’m pretty confident that that’s the case, so you’re picking up– it’s a very substantial retirement pension.
Ryan Isaac: Okay, so that part does make up a big difference of not having a hire income, for sure. Okay.
Reese Harper: And that’s the tradeoff of being a fireman, it’s the tradeoff of being a police officer, it’s the tradeoff of serving in the military… you do get a really nice pension.
Ryan Isaac: Okay, those are the distinctions I want to make. Here’s the question I think it would be helpful for us to discuss, and for our listeners: how do you know if you’re the person who should go own a business and be in private practice? I mean, like I said, this could be an associate who is wondering if they just stay in their job versus go open a practice, this could be everyone in the military who is wondering the same thing… “do I just stay here and keep the safety, security, stability, and lower income” versus– how do you know? How do you make that decision? “I’m going to be an entrepreneur. I’m going to run a business. I’m cut out for this. I should do it.”
Reese Harper: I might be overreading this, but when I see the word conscientious, I’m assuming that there’s more to his decision than money. I do they there’s a reason he went into the military; there’s a reason he made that choice. There’s probably a lot of joy and fulfillment that is independent of whether– I think it’s one of those things where if you said, “it’s sixes financially,” which one do you go with? There’s obviously an element here that is driving this person’s decision, and I really respect that, because for me, here’s what I can say for certainty: no amount of money that you earn in the private sector will really create a true, deep sense of fulfillment if that is not what you wanted to do. There are dentists out there that will work for a non-profit their whole career; there are people who will work for the community clinics; there’s Doctors Without Borders. There are a lot of professions that choose to make less money because of a conscientious decision, or because of an internal set of motivators that is driving them, and I can relate to that too. I’m not driven entirely by money, and I don’t think everyone is, but everyone is driven by money– we’re driven differently by money than the next person. I mean, someone might really need to be making $500,000 to $600,000 a year in order to feel like that’s the type of life that they were expecting, or that’s the expectation that they had, because that’s already a setback from what their parents have done, or what they saw their grandfather do that they respected, or– I mean, there’s deep psychology around the benchmarks that we set for what we want to achieve with our financial security, and I think it’s often relative to some psychological underpinnings of what we have seen, and so it really affects how hard we push, and what we want to do, and I think it’s important not to ignore that. Don’t let making more money push you so hard to where you’re forgetting the things that really give you joy, fulfillment, and personal satisfaction, because those are the things you want. You want to arrive at a comfortable income perspective that you’re happy with that’s a little bit of a stretch that you feel like you have extra money, and you’re doing things more than you thought you’d ever be able to do, but you’re also accomplishing those core goals, those core values, some of these conscientious issues that were in these questions, and the private sector will offer a financial opportunity that’s quite a bit more significant, and I think for the right person who is motivated by that, the private sector offers more financial upside, but for you as an individual, depending on how hard you want to push, how interested you are in taking on additional stress and some additional responsibility, it may not be worth it to you, because you could live an excellent life, I mean an $85,000 to $100,000 a year income with a pension–
Ryan Isaac: And no student loans that you’re going to have to pay back, and free health care–
Reese Harper: Living in Hawaii where the cost of living is– it’s not inexpensive, but if you’re on base, there are a lot of other subsidies that we’re not really talking about. I think ultimately, I would make the decision not based on money, but if you wanted to make it based on money, there’s an easy argument to show how it’s going to be more lucrative in the private sector.
Ryan Isaac: There would be. You’d end up with a higher note. It’s probably fair to say, though, that if you spend twenty years, I mean you had no students loans, you had free healthcare, you had a guaranteed salary, and a pension, you will have a fine future! Like, you’ll be okay, although it would be different. I think it would be interesting to know, what is a twenty-year career as a dentist in the military? Do you move every three years? The people I know in the military move every couple of years. Is that a big deal to you? Do you like the idea of choosing your location and having more permanence owning a practice in one place, and the kids go to the same school, and you live in the same house? There are, like you said, other factors that will kind of help make that decision. So, that’s a really good question! Okay, last question here. These come from a general dentist in Florida, another beautiful place. I’ve only been there once; I like Florida. He says, “I’m eighteen months into a startup. I’m a single-owner GP, and I want to know if now is a good time to start working with you guys. I do $680,000 in collections, and tracking for $750,000 this year.” So, the general question is when do I know that it’s time to hire and advisor? And I thought maybe we could– first of all, we did an episode on this… actually, if you go to our website dentistadvisors.com and click on the Education Library at the top, it will bring you to every podcast, article… everything we’ve ever written. You can filter through that; there’s a filter, it’s the one of the left, just find the thing that says “advisor,” and there’s like eight podcasts and articles on what to ask an advisor, when to hire one, what they charge typically, what the nature of working with an advisor is like, how to set expectations… so there’s a lot of resources on there, if you check it out. One that we specifically did was Episode 58: When is it Time to Hire a Financial Advisor?
Reese Harper: I think there’s a right reason to hire us, and there’s a wrong reason to hire us too. I think there’s a right reason to hire an advisor, and a wrong reason to hire an advisor, and one of the good reasons to hire an advisor is because you’ve gotten to a point and you’ve matured to a point where you see the value of spending your time in building your practice properly. Like, if you see the value of, “hey, I can take this from 680 in collections to 850, or if I can take 850 to a million, or a million to 1.2, or 1.2 to 1.5…” most people who get to a point to hire us, they see how growing their business doesn’t change the level of stress that they’re going to have if they outsource and delegate. So, if they outsource and delegate things like marketing consulting, or practice management, or insurance collections, or bookkeeping, payroll services, some consulting, legal working, financial planning, investment management, 401k administration… if you’re willing to outsource a lot of the things that some people are just unwilling to, and you know that growing your practice, focusing on the things that only you can do to grow your practice, which is improving your clinical competency, improving the speed at which you can deliver a high-quality experience for your patients, and continue to grow the size of your practice through either expanding your hygiene department, or adding associates, or adding locations, or adding operatories, or adding services, and that involves uniquely–
Ryan Isaac: That no one else can do for you; you can’t outsource that.
Reese Harper: Yeah, and need to both build your personal competency as a business owner and as a clinician, as well as spend time in marketing. You can’t just outsource marketing; marketing won’t do itself, and you have to understand how to test different channels, how to experiment with different budgets, and spending time on marketing and clinical and practice management is really the thing that will grow your wealth the fastest. Once people realize that, then they realize that hiring a financial advisor is actually one of the least expensive things that they could do with their money, because what we charge is directly proportional to the amount of complexity that you’re dealing with at any given time along the way. So, for example, let’s just say that you come to a fiduciary, Fee-Only advisor like us, and we have a flat fee that you have to pay for us to do ten or twelve different tasks for you throughout the year. Now, we’re going to look at tax planning, we’re going to look at retirement accounts, we’re going to look at investments, and insurance, personal savings, personal spendings, practice evaluation, practice statistics… we’re going to look at everything, and we’re going to charge a flat amount per year that’s probably the equivalent for most of you of doing like, ten crowns, okay? Like, it’s probably the equivalent for most of you of doing like seven and eleven crowns, okay? Or seeing fifteen to twenty-four comprehensive exams plus– like, it’s a very small part of your annual workload, okay? It’s probably like four… it might be like–
Ryan Isaac: We cost you seven crowns a year. (laughs)
Reese Harper: We cost you like three–
Ryan Isaac: Implants.
Reese Harper: Days of really low-profitability dentistry. So, in a whole year, you’re going to have to work three days to pay for your financial advisor so that you don’t have to deal with any of the financial stuff that he coordinates for you with your CPA, your attorney, your consultant, your bookkeeper, your office manager… you financial planner is going to do all of this stuff for you, but you’re going to have to work for a few days to pay for that. I think that for most people, by making that choice early in their career, at the point that they know that they want to grow, at the point that you know that you want to be larger than you’re at now. I think that the time you don’t want to hire a financial advisor is when you’re declining in collections, or at the peak of your career, winding down, and there’s not a lot of time to where the involvement of a financial advisor can make a huge difference. So if you’re three years away from retiring and you’re hiring a financial advisor, they can help you, no question, and I’m not saying you’re shouldn’t reach out–
Ryan Isaac: It’s still probably decades ahead of making the right tax decisions, and withdrawal decision, and account investment decisions.
Reese Harper: Yeah. But you’ve missed out on twenty years of compounded growth that you could have achieved by making smarter decision than you probably made, and I just think that we see that the time to hire a financial advisor is when someone has consciously chosen to grow and start to delegate, and not a lot of people are there. Like, there are just a lot of people who are not, mentally, in a position where they are outsourcing. They are trying to keep their cards really close to their chest; they’re trying to do as much as they can to reduce every expense. And philosophically, I mean, not everyone is listening to this, so they are not going to get this message, but I know that that holds people back. Like, that tendency that a business owner has to say, “I’m just going to do that, because–”
Ryan Isaac: “The biggest way for my to increase my income, or my margin, or my equity in something is to just reduce expenses, instead of grow the value.”
Reese Harper: And I just think that the time when, mentally, you believe that, is the time to hire a financial advisor. And I’m saying that because I know that many of you are not there right now. You’d look at the tasks of what financial planning is, and you don’t understand them well enough to really care, but as your situation gets busier and more complex, it becomes more obvious, and then you’ll really know. But I like that the person who is asking this question is probably– they’re just catching this early than most people would catch it.
Ryan Isaac: Eighteen months into a startup? Yeah!
Reese Harper: You know? Mentally, they’re starting to think about it, and I think there’s just a laundry list of items that we won’t go into on today’s show but that really do save a ton of time, and I think the time to hire someone is when you’re ready to grow beyond where you’re at. The last bullet I’d like to add to that question is if your practice is not paying you at least the fair wage that you would make as an associate… so if I look at that $750,000 in collections, and you’re not even making 30% of that, it’s probably not time to hire a financial advisor. It’s probably time to start a relationship with one, to know who you’re going to hire, but that financial advisor should be telling you to get some help in the practice, right? The financial advisor should be– in this case, it looks like he’s growing fine, so, it just might be early. But if you’re stagnant and stuck, and you’re making literally like 30% of your collections total, you don’t have a healthy practice yet, and I think you have some consulting work ahead of you that would be of better use; instead of investing money in public markets, in investing money in a 401k, or investing money in a brokerage account, as long as you have a little liquidity, you know, maybe three to six months worth of cash backup– and many of you might not have that because you’re struggling… if you don’t have that, you just know there’s consulting to fix a practice: there’s problems with your hygiene department, there are problems with your insurance collections, there’s a problem with your AR, there are problems with your building and processes, and those need to be fixed before you hire a financial planner. But if you’re making even a 10% profit beyond your normal associate production percentage, so if you’re making 30% of your collections, plus you have 10% left in profit, I mean, even at that point, it’s probably time to start; it’s a healthy enough business to get a financial advisor. And even if you have no liquidity, and no income, that’s not the point. Most people wait to hire a financial advisor until they have money, because they’re like, “well, I don’t want to go to a financial planner if I don’t have a portfolio,” because the industry has convinced people that until they have the minimums they need, like, “you’ve gotta have 500 grand or you can’t talk to a financial advisor!” or, “you better have a million, or you can’t talk to a financial advisor!” or, “my limits are a million, I’m sorry, I won’t talk to you unless you have at least a million,” or “we’re three million and up, you’re way–”
Ryan Isaac: Except then you go look through the clients, and you’re like, “they don’t have a million, they don’t have a million…”
Reese Harper: You’re like, “well okay, if you average your clients that you’re publicly disclosing online and divide it by the amount of money you say you manage, it looks to me like your minimum is more like ten grand!”
Ryan Isaac: (laughs) That’s so common.
Reese Harper: So anyways, there are a lot of games that financial advisors will play to position themselves as kind of high-end in the market, like, “yeah, we’re only working with people with five million or more.” It’s like, “come on.” I’m just saying, a business who can only service the rich? Like, if you can only service people who are loaded, you’re not helping 92% of the population. And so, the way we have tried to structure things is that we expect many of our clients to come to us with very little assets. The exception is when someone comes who has significant wealth and feels like they need to make some adjustments; that’s probably 20%-25% of the time. But 75% of the time, most people are going, “is it really time to start hiring and advisor? Because I’m not that wealthy, and I really don’t have a lot going on.” And that’s precisely the time when you need to start that advisor relationship, because you want to get started making– you want to avoid the mistakes that everyone else makes along the way, and you don’t want those mistakes to be the reason you hire an advisor, you want to avoid them in the first place. And so, I just think it’s important for people to realize that– I would say pragmatically, don’t hire someone if your practice is really really struggling. If you have no free cash flow, and you’re not able to accumulate any liquidity, then it’s still a practice problem at that point. But as soon as you start getting to the point where you’re like, “I’ve got a little extra money. Should I pay down my student loan? Should I put it into an UTMA for the kids? Should I put it into a brokerage account? Should I start my 401k?” then it’s time!
Ryan Isaac: If you’re asking yourselves those questions, then that’s a good indicator. Alright, well thanks everyone for listening. Again, we would love for you to keep asking questions for the next Q&A show, so go to dentistadvisors.com, click on the “Podcast” tab, and then, what does the button say? There’s a big button on there.
Justin Copier: It says “Submit Question to Podcast.”
Ryan Isaac: Yeah. It’s pretty self-explanatory.
Reese Harper: Not for me! I would be confused by that button. I’d be like, “what do I do?”
Ryan Isaac: He was confused by that. I click it all the time. Go submit a question! We’d love to hear from you. Check out the new website; like we were talking about before, there are a lot of resources on there. Dentistadvisors.com, we have the education library at the top; you can filter through any topic. There is also an intro series, so right when you go to the home page, there’s a big button as well that says “Watch Intro Series,” and that will walk you through… how many videos are on there? Like six or seven short ones; they are not long; they are not painful. Very short, and they’ll walk you through our process, our philosophy, our pricing, when to hire an advisor, everything! All these questions. If you’d like to talk to us, you can click on the link that will book a free consultation; we’d love to answer your questions in more detail and hear about our situation. Or you can call us at 833-DDSPLAN; we’d love to hear from you. Thanks!
Reese Harper: Carry on!Taxes, Advisors, Practice Transitions