Listener Q&R #12: Protecting Your Assets, Planning for Retirement, and Navigating Inflation

On this listener Q&R (Question and Response) episode of the Dentist Money Show, Matt, Jake, and Rabih answer three listener questions about managing risk, planning for retirement, and navigating inflation in dentistry. They talk about how umbrella insurance can help protect dentists’ assets, how to think about balancing traditional retirement accounts, Roth accounts, and taxable investments, and whether dentistry is still a financially rewarding career as inflation and practice costs continue to rise.

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Podcast Transcript

Matt: Welcome back to the Dentist Money Show where we help Dentist make smart financial decisions. I’m a guy named Jake. I’m here. I’m a guy named Jake. I was

Jake: Yeah, you are.

Rabih: Yeah, you are.

Matt: looking at Jake when I It’s clearly been a while, guys. We’re gonna go ahead and edit

Jake: Michelle, keep this in.

Matt: I’m a guy named Jake. I was getting ready to introduce Jake. All right. I’m Matt and I’m here with hot take Jake and of course the professor Rabih Dimachki Hey guys, how are ya?

Rabih: Hello.

Jake: Great. Life is awesome.

Matt: It’s awesome, Jake. We feel in is it is it really awesome? I mean, it’s sports awesome.

Jake: It is.

Matt: Not that we’re gonna go down that road, but it’s sport’s awesome, but is life in

Jake: Good.

Matt: general awesome?

Jake: I cannot complain. I think things are great. This is a fun time of year. It feels like there’s a lot of stuff happening. anyway, yeah. I don’t know. Just in general, life’s good.

Matt: Yeah, it is a fun I I love this time of year. Not to sound like so basic, but I do love this like my favorite time of year in Utah is this late September

Jake: Been beautiful.

Matt: through October, even like and the weather right now is just crazy good. It’s like eighties every day in Utah

Jake: And warmer.

Matt: right now in early October. But Rabih, is life good for you too?

Rabih: It is, it’s just very, very busy. I can’t

Matt: Yeah.

Rabih: wait for like fall break to take a breather a breather. But yeah.

Matt: Yeah. Well, yeah, between work being busy, nick kind of going into Q4, and then you’ve got

Rabih: Yes.

Matt: professor, professor type things to be doing, teaching the molding young minds, of course. We’ll do a whole

Rabih: My goodness, they’re a hopeless case, but yeah, we we’ll call it that.

Matt: episode on that of the the issues with with college nowadays or university. So okay, we have a big show today, but first, of course, before we jump in, want to remind everybody this show is brought to you by dentist advisors. I’m sure you guessed it, dental specific financial planning tax firm and accounting firm for dentists all over the country. Between our two teams, we work with over 1,500 dentists all over the country, all 50 states. if you are, you know, out there, as Taylor, as our boy Taylor Sutterfield says, good general advice is bad specific advice, and all we give on this show has to be general advice. So if you’re looking for specific advice, we are here. You can go to dentistadvisors.com. Click on the book free consultation button. so with that said, guys, we have a big show today. it’s been a while. It’s been a while. I don’t even know the last time we did a QR episode. So we thought we had a bunch of good questions that have come in just as of late, and felt time to to to do a QR episode. So we’re gonna jump right in. we have three story problems, as they used to call them back in the day. Three, these aren’t like

Jake: Yeah.

Matt: quick, easy questions. These are big paragraph type questions. So I’ll read the first one and then we’ll just we’ll just jump in. So this is regarding an umbrella policy, like personal liability coverage. So this came in recently, and I’ll just read it word for word. So hi guys, I’m considering increasing our two million dollar umbrella insurance policy, but I’m not sure if that’s necessary. I can’t seem to find an evidence-based answer for how much coverage to have. What is the actual precedent for lawsuits where umbrella insurance was required? I’ve heard of insuring up to the level of assets, but what’s stopping someone from suing you for more? And if you have $10 million in assets, is a $10 million policy really needed? Do lawyers actually look at how much coverage andor assets you have before deciding the lawsuit amount? There’s a lot of questions. Yeah, we could

Jake: There’s like four questions in there, right? That we can tackle. Yeah.

Matt: probably just do the whole episode on this. There’s a lot of questions there, but just generally like let’s maybe like break this down kind of layer by layer.

Jake: Let’s talk about umbrella insurance first in the first place. Maybe give it quick for the viewers who may be confused on that. So umbrella insurance is

Matt: Yeah, Jake, you wanna kinda just give a an overview on that?

Jake: pr what’s called personal liability insurance, meaning which you have liability insurance naturally so through other forms of insurance. So if you have like an auto insurance policy, part of that auto insurance policy will involve some sort of personal liability. If you get in a car wreck with somebody, the other person is seriously injured or damaged, and they want to come after you personally, your auto coverage can cover parts of that liability there. Same with like a homeowner’s policy, right? If you have a home and you have homeowner’s insurance and I don’t know, like I’m trying to think of an example here. Like another kid comes over to your house and jumps on your tramp and breaks his arm or something. And technically like you could be open to a lawsuit there and homeowners, part of your homeowner’s policy will cover liability protection with that. So what an umbrella policy does is it gives you liability protection above and beyond those other insurances. Typically you most people will bundle their umbrella coverage with a homeowners or an auto policy. but yeah, in essence, if someone comes at you, if you’re getting sued, an umbrella policy can can pay out in the case of that happening, illegal liability.

Matt: Yeah. And one of the J Jake to that point, one of the mistakes people make often is not being aware that, as you said, your home and auto policy will will interact with or or pair with your umbrella. And a lot of times these home and auto policies will have or sorry, the umbrella policy, what kicks in after, will have a minimum threshold. So meaning before your umbrella policy kicks in, it will require you to have a minimum amount of coverage on your Basic auto policy, let’s say. So just for quick, easy numbers, let’s say you’ve got a $5 million umbrella policy, but it requires you to have $300,000 in base coverage from your auto, home and auto, and but you only have $250. There’s a $50,000 gap there that you would be on the hook for before your umbrella policy kicked in. So that’s a really common mistake or or error. that we see of people just kind of not thinking about and seeing how those are those are paired up. So could cost you some money without you really thinking about it if you were to be sued.

Jake: Yep. In general, we recommend that most dentists get an umbrella policy. We talk about this, I think, all the time, which is being a dentist. And in most communities, a dentist is viewed as somebody who has money and who has assets. And so they tend to be subject to more lawsuits than the average person, you know, being a business owner and a dentist there. And so umbrella is just a way to protect you when people are you’re coming after you to not touch your personal assets, but the umbrella policy can help pay out in that scenario.

Matt: Yep. I also did a little bit of research on a couple of different things, but we’ll just hit this really quick. roughly eighty percent of and and this hasn’t been confirmed by like anything but our friend Google, but eighty percent of umbrella insurance claims stem from an auto accident, which is not shocking that a

Jake: That feels like pretty common. Yeah. Yeah.

Matt: good a a good amount of like majority of these claims or you being sued would be like you got into a fender bender and someone’s or or or a bigger accident and someone finds out you’re a dentist and they’re like, you know what? I’m coming after you. Like that

Jake: Do you guys ever think about that? I think about maybe more often than I should, which is that like driving is the most dangerous thing that all of us do every single day.

Matt: So dat yeah, it really is.

Jake: it’s just kinda like people just get in wrecks and get hurt and and die all the time. I don’t

Matt: All the time.

Jake: know, Rabih, is this going away with electric cars? We’re not gonna have any wrecks more once we get more electric cars. Is that a thing?

Rabih: I think this n nowadays with cars, because it’s dependent on the individual driver, you’re going to have so many small accidents. But when everything is running on the same grid, the same AI model running them, you will not have the small problems, but you’re gonna have a system wide crash where suddenly all cars stop. So I don’t know if shifting the the the the problem from small incidents to a big, large catastrophic one is the way to go. But let’s hope they have Yeah.

Jake: I knew I knew you’d have a response there. That’s why I asked ya. I

Matt: Yeah.

Jake: knew you’d have something to give us. Okay.

Matt: so now that we’ve kind of level set on umbrella, so the from an actual precedent for like lawsuits and when umbrella is is is required, we we don’t really have that data, to be honest.

Jake: I don’t think it’s publicly available because most personal liability lawsuits get settled, right? I think before they even go to court. And so they get settled out

Matt: So yes.

Jake: of court. And so we don’t have data on what people are settling for. so it’s hard to get like here’s here’s like an average or a median like personal liability lawsuit amount. I just don’t think that data is readily available.

Matt: I’m so glad that you brought that up, Jake, because so this person who wrote in, I I responded back to him personally. And that’s exactly what I said is the data shows that ninety to ninety-five percent in some data sets, it shows up to ninety-seven percent of these liability lawsuits go to settle or are settled outside of court. That’s kind of the game. Like that’s what these people, these quote unquote like ambulance chasers and these people are are doing is they’re going after your insurance.

Jake: They don’t want to go through a court process. Yeah. Yeah.

Matt: And they’re settling outside of court. So that’s why we don’t have precedent. But it also shows why you all also need this. Because a lot of times when they go to do this, they will find out what your coverage is, and then they will kind of attach their settlement to that number.

Jake: Yeah. Which is interesting. That’s his last question, I think, in this paragraph was like, do lawyers actually look how much coverage and assets you have before deciding to put a lawsuit in motion? Like, absolutely, yes. And funnily

Matt: They do. Absolutely they do, yes.

Jake: Enough, most of the time they will actually just go up to your insurance amount because that’s the most easily gettable money for them. They actually don’t even want to touch your personal assets. They just want to essentially make the insurance company pay them out. And so they’ll say, like, do you have a million dollar umbrella policy? Well, we can probably sue this guy for up to a million bucks and try and get

Matt: Yep.

Jake: Some of that money.

Matt: Which maybe there’s a counterintuitive argument there of like why you shouldn’t have coverage. But

Jake: Have less. Yeah.

Matt: but actually not true. Because in reality, what what this comes down to is your umbrella. So this guy’s j generally saying, like, what how much do I need? Right? How much do I need? We’ve always said and we encourage dentists to have at least enough to cover your net worth, especially your usable net worth. Because I think the alternative here is let’s say your In a car accident, person finds out you’re a dentist, like, I’m gonna go after and sue this person. Lawyer gets involved. They find out that you have a seven million dollar net worth. And let’s say no umbrella coverage. Well, they see seven million dollar net worth. They’re still coming after you. So you’re still a target if you’ve got a high income and a high net worth. Because the other thing is some they can actually garnish wages. They can actually come after future income in some of these situations. So The sad reality is we live in a very litigious country. People are out there depending on the state, but there are full like mini economies built within states like California, I’m looking at you, where people are literally making a living off suing people. And so this is something to to definitely Exactly.

Jake: But make the insurance company pay out and not you, right? That’s the whole point. Even you have the policies, like the insurance company will pay. Even this is annoying and frustrating and probably a hard process. They are not coming after any of your money. Now there’s we can dive deeper a little bit more into this. Like some assets that you do have on the personal side are protected against certain lawsuits.

Matt: Yep. Yeah, you want to hit that.

Jake: Like 401ks are a big one in retirement plans. Most of the time, 401ks are protected, similar with IRAs too. Any individual personal retirement plan are protected. I know like home equity, right? Homes in certain states can be protected against

Matt: Depends on the state.

Jake: a lot of this depends on the state, I think, too. Each state has own individual laws for personal liability lawsuits. And so, but those are like the big ones, retirement plan assets. I know some home equity. do you have any else on that list, Matt? I don’t like those are the big ones. But if you have like two million dollars and like four or one K an

Matt: No, I think that’s basically it. Like y a brokerage account.

Jake: IRA. it’s like I maybe don’t need to get umbrella coverage to cover that amount. Maybe I can cover up to my net worth outside of those four one Ks if you’re wanting to get really particular with it. Umbrella insurance is pretty cheap.

Matt: So okay, so this is what I wanted to kind of like wrap up this

Jake: Okay.

Matt: area or this topic of. If we look at just like the classic textbook answer and come back to like a principle, like a general principle of this, there’s a couple of boxes to check here. So two the two box main boxes when it comes to how to handle risk in your financial life is frequency of event or likelihood of frequency of event, and then consequence of the event. So this falls under the classic low frequency. High consequence. So the actual data would show that your likelihood or the the chances of this happening is relatively low. but if it does happen, the consequence is massive. Exactly.

Jake: You could lose two million dollars, right? Or a million and a half dollars, you can lose a lot of money.

Matt: And then if you factor in the third checkbox, which is how much does it cost to cover myself? Umbrella to your policy, to your point, Jake, is quite low. So that check, check, check. Like this is the classic transfer this risk be overinsured rather than underinsured. Cause we’re not talking about a massive cash outlay for yourself. anything else you guys would add, Rabih, anything else you’d add to any of this?

Rabih: Yeah, as I’m listening to you guys, you are the expert on this, but there’s that sentence. It’s like I can’t seem to find an evidence-based answer for how much coverage I could get. And I’m like trying to tease it out. But if I want to think of a framework, what you guys are saying is that the minimum you have to pay is the value of what you broke, kinda. So the the lawyers are only are really going to go after the minimum they’re gonna accept is what got broken. And on the higher end, they’re gonna go as much as you allow them. Which is if you do not have an insurance policy, they’ll go after the full net worth. But if you have an insurance policy, they might go up to the insurance amount, the coverage by the insurance. I have a question for you guys. If you had like a five million dollar net worth, but you chose the coverage of the umbrella policy to be like 15 million, will the insurance company at payout day tell you, well, we’re not gonna go all the way to 15 million, even though you were paying, just we’re gonna go up to five? Is or or are you locking in a bigger

Jake: It’s no, it still depends on what the accident was and what caused it. Or like a fifty like for them to come after fifteen million dollars, you probably had to have gone into a car accident with a really wealthy person. And maybe they can argue like I won’t be able to work for the next five years and my salary was three million dollars a year, and someone coming after you for that type of things. So it still is dependent on the accident and the case of what they’re

Rabih: Mm-hmm.

Jake: Gonna go after. But yeah, I think there might be an argument like they have this umbrella policy, let’s just go after this insurance company and see how much we can get from the policy. But again It’s not harming you really in that case, other than you just had to pay higher premiums up until then. I I don’t know

Matt: Yeah.

Jake: if you have a different answer, Matt.

Matt: No, I think you’re right. I mean, caveat here, none of us are legal experts, but there is kind

Jake: Yes, we are not.

Matt: of this like vague term always used in these types of cases, which is punitive damages, which is where they actually get you. so but but I don’t know if it’s as simple as they look at your policy, you’ve got a bigger policy, so you’re they’re gonna come after the max

Jake: It’s not.

Matt: amount. Cause there’s also this idea of like precedent. And all the attorneys know, like there’s so much case law that they have of like, okay, like in this scenario, we can kind of be within this range of based on precedent. That’s really what it would be based on. rather than like they just see a big policy. So that that would be kind of my my general take on

Jake: Yeah. I mean his question is he’s like, I have two million dollars in coverage. I don’t know if that’s necessary or not. I my response to that is.

Matt: Well he said he’s incre he wants to he’s considering increasing his two million dollar policy.

Jake: increasing too much. He’s like, doesn’t know if that’s necessary. It may not be. I think again, a lot of insurance conversations are just what is your own personal risk tolerance? And you can kind of rely on the whole what helps me sleep at night type of situation. There was some people are like, I don’t actually like two million dollars plus my assets, like I feel comfortable there. other people wanna have more coverage. A lot of this does come down to just what do you feel comfortable with, insurance wise.

Matt: I’d say base minimum though, base minimum would be if we’re gonna say like a a blanket statement, general advice here, would be at least enough to protect your liquid assets. Cause I think a to Rabih, to your question, I do think if you’re sitting on a bunch of cash and let’s say a two or three or four million dollar brokerage account that’s liquid, you’re more likely to become like they’re coming after you. And I’m not saying for the total amount. But what you’re doing is you’re leaving your liquid balance susceptible to a lawsuit. And so you might have a $10 million, you might have a $10 million total net worth. And I think his question here as it gets into it is like if I have 10 $10 million, do I really need a $10 million policy? It’s probably not that clean because you might have five of that in retirement accounts in your personal business that would be protected in the LLC. But again, if of that ten million you’re sitting on two, three million liquid, you absolutely should have at least enough to cover that liquid balance, in my opinion.

Jake: Agree.

Matt: Anything else, guys, you’d cover on Umbrella? Did we thoroughly nail it, Rabih?

Rabih: I I would just add one point because like umbrella policies are one of the harder policies because you will not know how big of a magnitude the the event when it happens it’s going to be. But if you take any other asset that’s a much easier one, I have a house that’s two million bucks. Well, you know the policy is going to be two million bucks. If you try to insure more, then you’re going to compare it to the premium. And that if I want to give an evidence-based answer, it’s like What is the payout if it happens versus how much the premium accumulates if it never happens and the premium go indefinitely? And there is going to be that equilibrium point between the cost of insurance and the payout of insurance. And this is what you usually use to calibrate the amount of coverage that you need. But this is in an easy situation where you know the asset that you’re trying to protect. And a liability aspect. It’s not only the assets what you have, but also what you broke, which makes it a little bit harder.

Matt: Yeah. Go ahead, Jake.

Jake: Yes. And notice in this scenario, yeah, I don’t you’re really with umbrella coverage, you’re not running the risk of like if I had to save these premiums, could I pay for any damages down the road? I mean, premiums are like a couple hundred dollars a year is what you’re paying for umbrella coverage. And so you’re never like you’re paying a couple hundred bucks a year for millions of dollars in liability coverage, the risk return there is usually worth it to pay the premium, similar to a life insurance, I could term life policy. Not like health insurance, which we don’t need to get into that, but we could have that conversation. I’ve been having it recently.

Matt: Let’s get into that conversation later last thing I’ll just add from an evidence-based approach, or you know, trying to bring some evidence to this. the statistical likelihood, again, according to our AI friends and and Google, the statistical likelihood of facing a lawsuit that completely exhausts your home and auto policy that goes beyond that is quite low. So this is they’re estimating less than one percent per year. For the standard household of these. So basically just saying like, even if you get into an auto accident and you were to be sued, most of the time that’s being settled via the like the actual auto policy and like let’s say the $250,000 limit there. and it wouldn’t go beyond that. So again, low risk as far as frequency, but massive high consequence and probably still very much worth, especially as your net worth grows. Okay. Like it. Okay. Let’s jump into a really big question. this came in on our Facebook group a couple weeks or maybe even longer ago about retirement withdrawal strategies. I’ll be sick of hearing my voice, so I’m gonna read this one again. Let’s go for it. All right. In some of your podcasts, you recommend having twenty-five to thirty times your desired future spending in your investment account. So for example, if I want to spend $200,000 per year in retirement, I will need $5 million on the low end and $6 million on the high end. I’ve been doing some research on different account types, such as a traditional 401k, Roth, and brokerage account. $5 million in a traditional 401k versus Roth IRA versus brokerage account results in very different after tax amounts. Very astute. That was my comment, not this. for your 25 to 30 percent or 30 times rule. Do you assume a specific percentage for each of these accounts? I assume the ideal would be to be 100% Roth, but that does not feel realistic. What ratio between these accounts is ideal or recommended? Also, is there a conversion calculation between accounts? For example, $1.50 of a 401k money equivalent to a dollar in Roth and $1.20 in brokerage account. And then we’re going to add this because he gave us some props. As always, thank you for your insights. You guys are one of the my favorite investment podcasts. You consistently provide actionable insights. We really only picked this question because we wanted to read the compliment at the end.

Rabih: Ha ha ha.

Jake: Yeah.

Matt: no, to your point, Jake, this is like five questions in one. So

Rabih: Yeah.

Matt: but where do you

Jake: We can break it down.

Matt: want to start with this? What are you guys like the general principle of this? Any thoughts?

Jake: Well, I can I know Rabih probably has he can dive into the meat of this, but in short, no, when we’re talking about our twenty-five to thirty times amount of spending you need in assets for retirement, we are not factoring in taxes to that number. That is purely a portfolio survival strategy, right? We are basing this off of comfortable withdrawal rates. At twenty five times your annual spending and assets, you can withdraw about four percent from your portfolio, and at thirty times is three point three three right percent of your portfolio. Per year. those are pretty safe withdrawal rates. We can talk about, you know, there’s kind of a range of maybe three to five to maybe even five and a half, six percent, that some people may think. But those are based on safe withdrawal rates, portfolio survival, and do not take into account taxes there. The easiest way to think about taxes, I would think the simplest fix in retirement is is just to include taxes as part of your spending or how much you need to withdraw. There’s a lot of other things to dive in here. Do you guys have any other that’s like my opening statement, I guess you could say?

Matt: yeah, I love that. Go ahead, Rabih.

Rabih: what I would say is that this is a classic example of a general advice. And as Jake said, the the question it was trying to answer, how long can a portfolio sustain itself? It wasn’t trying to answer how long can the portfolio of this specific dentist who lives in this specific state that has that specific taxes and these financial goals can survive, right? So once you want to go in into the weeds of it, there are multiple factors. I do not certainly have any opposition to the fact that you’re trying to make an apples to apples comparison and trying to see what is a dollar’s worth in a 401k equivalent to in a in a Roth or in a in a brokerage account, that is fine. But once you do that calculation, what where do you go from there? Right? Like is the once you get that information it’s like, my Roth IRA money is kind of on an after tax basis worth more than my brokerage. Okay. How are you still going to choose which one to liquidate from? Right. So it is not enough to go after and make that assumption, in my opinion. So, yes, it’s a good exercise, but the decision that has to be made that has the most impact on how long your portfolio can survive is the marginal analysis that you’re doing rather than this comparative analysis. Comparative analysis is just saying how much my dollar is worth in each account. Marginal analysis means is that at this moment in time, if I want to take out $200,000, which account am I gonna take it from to sustain my portfolio longest and reduce my tax drag the longest? And this decision is going to be different every time you run the analysis. Because every time you run the analysis, the market environment, the economy, probably the tax code has changed or shifted. So The analysis at the margin for the next step that I’m gonna do, which is taking the next $200,000, what is the best decision to do? But that one is going to be changing because it’s not only about how much money are in each account, but also how is the market impacting each account, especially if they’re invested significantly different from one another.

Matt: Yeah, I knew I shouldn’t have gone after Rabih. That was so good.

Rabih: Yeah.

Matt: So good. he’s asking, you know, is there an ideal spread we want to see? And and Rabih, you hit it. It’s like Not necessarily. I mean, again, it’s so specific to the person.

Jake: It I think it’s an interesting point they bring up of they said, like, is obviously like a deal would be a hundred percent Roth. I actually don’t think that’s even the proper assumption because you can make the argument that you actually want pre-tax dollars in retirement to fill up the ten and twelve percent bu buckets,

Matt: Yes.

Jake: and that’s more ideal than having just paying thirty seven percent during your career, and now you’re just paying zero later on. It’s like you could have actually saved the thirty or seven percent and paid at twelve percent. And in that scenario, maybe four one K pre tax assets are more favorable than even than Roth in retirement.

Matt: Jake, I’m so glad you went there because I love I same page. The assumption that there’s no cost to you to fill that Roth bucket. And to assume, like you said, that you’d want Roth in retirement, maybe, maybe not. Maybe you want everything in pre-tax because you made so much money and saved so much on tax. So I love that you brought that up. I would say if we’re again, if we’re giving general advice here, what’s an ideal spread is. Some type of spread. Meaning you want some type of diversity in the assets that you hold. Ideally, you want a chunk in brokerage, you want a chunk in Roth, you want a chunk in in pre-tax, because it gives you the most optionality in retirement. And Rabih, it comes right back to what you were saying. If you’ve got these buckets, then the the rules of the game have completely shifted now that you’ve gone from accumulation mode into retirement. And The strategy of in which you’re using is going to depend on all those factors you highlighted, Rabih. But you want all those tools in the tool chest to be like, okay, where do I pull from this year? That’s gonna change this year to next year to the year after, depending on, again, endless amounts of factors, either either at the macro level or the personal level. So what’s an ideal spread? Persp specific percentages, we don’t know.

Jake: Like having options.

Matt: But you’d wanna have some type of spread in those assets for the typical dentist. And by the way, in most cases, you’re going to because the typical dentist is going to reach a limit of how much they can fill, how much they can put into a pre-tax account and then have overflow into things like doing backdoor Roths or brokerage accounts. So if you just follow a system for the typical dentist, you’re most likely going to end up with a big pile in a in a bunch of these accounts.

Jake: Do we want to back up just really quickly for some of the listeners who may be not super familiar with like the tax implications of each of these accounts, which is what he’s getting to? So just really quickly, if you have Roth IRAs or you can even have a Roth 401k, Roth assets mean after tax. When you withdraw those funds in retirement, you don’t pay any tax on that amount. So that’s like the most favorable, like tax wise 0% tax rate on that amount. A brokerage account is also an after-tax account, but you do not pay any taxes on your contributions. You pay fully just on your gain. But on your gain, if you’ve held the assets for longer than a year, they are subject to capital gains tax, which is either zero, fifteen, or twenty percent. And then like pre-tax 401k, your IRA assets are ordinary income taxes, right? Which current tax code is 10% all the way up to 37%. there. And so kind of that’s like the line there, which is kind of why this guy was assumption assuming you’re just talking about like a hundred thousand

Matt: Like a dollar fifty versus

Jake: dollars in a Roth IRA is worth more than a hundred thousand dollars in a pre-tax 401k.

Matt: Which is true. Yeah.

Jake: Okay. Right is what he’s saying. Mm-hmm

Matt: Well, which is true is assuming you’ve got

Jake: Depending on your tax rate.

Matt: enough income coming in in retirement to put you up into the ten percent bracket.

Jake: Yes, which is interesting. Your tax rate in retirement is solely dependent on how much you spend. Right? It kind of flips there where it’s like it’s not what you’re earning, it’s what you’re spending, right? So if you only need a hundred thousand dollars in retirement, you’re going to be in lower tax brackets than someone who wants to spend four hundred thousand dollars in retirement. And so that’s where this comes into play. Just how many assets it’s not really how much assets you have. I guess it can’t get into with RMDs, but it’s how much are you planning to spend in retirement determines your tax rate.

Matt: Yeah, that’s a huge misconception for a lot of people, Jay, because they assume their situation tax-wise is going to stay the same because their lifestyle is the same, which is true, but your lifestyle does not dictate your lifestyle only dictates your income or sorry, your tax situation in retirement, not pre-retirement. Pre-retirement’s all about your income and what you’re generating

Jake: Mm-hmm.

Matt: from your business. So that is a huge misconception. Rabih, let’s get you back in here. What are the thoughts do you have on this?

Rabih: No, I I agree with you. Just for the you know, the the reality of how dentists accumulate money across their career and how they hit limits much faster than others, and how they really care about liquidity throughout their career will put them at a point when they reach retirement where the money is automatically distributed across multiple accounts when they reach retirement. It’s just de facto, this is what happens naturally when you’re making good financial decisions. In the earlier years. That is just the outcome that is out there. So once you’re at that position where you have multiple accounts, there is no secret formula of just like which one I liquidate from first. But there is like we do not know exactly what we want, but we know for sure what we do not want. And what we do not want is to not have optionality, is to have all the money stuck in one account, just like in the example of they are all in the Roth. Because optionality really helps. Assume we’re in the middle of a bear market while in your retirement, unfortunately. Well, if you had the choice between taking money out of the Roth versus a brokerage account, it’s a great time to be taking the money out of the brokerage account because the tax impact is going to be much lower during a low year. Whereas if you’re in a bull market, well, yes, you would prefer to take them out of the Roth than the brokerage and delay the taxes from the brokerage as much as you can. If you are stuck with one type of account, Whether you’re in a up cycle or a down cycle in the market, you’re forced with that and the tax amount you pay is out of your control. Having multiple accounts gives you optionality and that by itself is more valuable than just being in one account, regardless of which account you choose to liquidate from, because that’s state state or market dependent.

Matt: Yeah, it’s a great point. I want to come back really quick, if we can, to the 100% Roth comment. Because if we say I assume the ideal would be to be a hundred percent Roth and we we push back on that. But if we want to take that a little bit further, let’s say let’s let’s highlight what would be the ideal scenario where you do end up with 100% Roth as far as the retirement accounts go, which would be, again, generally, you’ve maxed out. Every single year for 20 or 30 years at your highest marginal bracket in your 401k and any retirement accounts and received all those benefits, you retire well before your RMD age, let’s say 10, 15 years worth. And then you’re able to convert that balance into Roth strategically, filling up your lower brackets, locking in an automatic, like let’s say 20% savings every year, and then get to RMD age and 100% at that point is in Roth. That is the ideal scenario.

Jake: Yeah. Were you getting the tack yes? I I have

Matt: Absolutely, if you could do that. So I just wanted to add that nuance there. Jake, what are your thoughts?

Jake: had a lot of people recently, well, I don’t know if about a lot, but a few people recently who have been complaining to me about their RMD amounts. So for people

Matt: Yeah.

Jake: Who don’t know, that when you say RMD is required minimum distributions, if you have any pre-tax money in four one K, again it’s typically IRA by this point, you got that tax savings when you put money into the accounts. And then by the time for most people now it’s about 72. When you turn 72, the IRS essentially says we want our money now. Like you’ve had this pre-tax money for long enough, pay your taxes on this amount. And so every year you actually have to liquidate and take withdrawals from that account sing every year based on a percentage of of where you’re at. Which I’ve seen people frustrated where it’s like, man, I’m happy to take, depending on your pre-tax balance, if it’s quite large, I mean you could be withdrawing fifty thousand, a hundred thousand, two hundred thousand dollars from these accounts every year, which is automatically bumping you up into a pretty high tax bracket. And you’re having to pay taxes. And so I have seen a lot of people recently say, Man, I actually kind of wish I would have done more Roth or after tax earlier on in my career because these RMDs are bugging me quite a bit later on, which is interesting.

Matt: Yeah. And again, if you are a dentist out there nearing retirement or planning on retiring well before that 72. So let’s say fifty-five or sixty, you’ve got a window, you’ve got about a decade there or so of time to be strategic with how you move assets from your traditional or pre-tax accounts to your Roth. It’s a really it it can be a really favorable strategy tax wise. As long as you can stomach paying taxes on that money year to year. But if you look at the math of it, in most cases, a lot of cases, it’s gonna come out very favorable.

Jake: In

Matt: And then to your point, Jake, lower the stress when you get to R and D age if you have a le you know, way less of a balance there.

Jake: Gives you more flexibility. I did run a just some few broad numbers. I think in general, most people pay a lot less in taxes and retirement than they think. Again, I think this is people getting

Matt: yeah.

Jake: caught up on where it’s like they think just like their income rate that they’ve been paying is going to continue over. It is not. And depending on where you take from these accounts. So just for just again, some broad numbers here. I just ran some examples if you spent 100,000, 200,000, 300,000, or 400,000 in retirement. Let’s just say again, like These are very broad. It depends on your mix of assets. But if you’re like 50% pre-taxed, 50% brokerage account, I’m not even including any Roth, right? It’s fifty percent pre-tax, fifty percent brokerage. At a hundred thousand dollars of spending, your federal effective rate is one point eight percent in taxes that you’re paying on a hundred thousand of spending. It’s just closer to five percent if we add state in there. but like one to five percent, depending on your state, is why you’re paying at a hundred thousand. At two hundred thousand, you’re paying six to nine percent. 300,000, 9 to 13% and 400,000 of spending, you’re paying 11 to 15% effective tax rate in retirement. so that’s with no Roth. That’s just half brokerage, half pre-tax. So I just think that’s in general why people argue 441k is let’s take the deduction right now, my highest marginal bracket of 32 to 35%. Once I’m in retirement, I am paying like 24% or something on that marginal tax rate and filling up other buckets actually. So it’s not even, you know, it’s close to your effective rate. So taxes are typically pretty low for most retirees

Matt: Much lower.

Jake: if you don’t have any active income from like rentals or different things. But if you’re just distributing assets, tax rates are pretty low in retirement.

Matt: Yeah. I’m glad you brought that up. Rabih, anything else you’d add to this?

Rabih: I I think we covered it. There is no magic formula, but there are no no’s to avoid, right? Just a lot of RMDs or being stuck in one account or not being aware of what the market’s impact on your current portfolio.

Matt: Yeah. I would say if if anyone’s out there anyone out there listening thinking that you’ve like won the game, you’re retired, there’s nothing to really worry about planning wise, I say El Contrer, Montfreyer. Hopefully this answering this question has given you some insight that the game completely changes and a lot a lot of cases this is where a lot of the planning begins and complexity goes way up. So this is where planning becomes so critical. I would say, you know, years before you actually exit, it’s a ton of planning to do there. And then certainly as you exit and get into actual retirement, it’s just a completely different game. So absolutely seek help in that scenario. Okay, Jake, I’m gonna let you set this last one up and and go

Jake: Okay.

Matt: Through it. If you have the doc there in front of you,

Jake: I do.

Matt: Because you’ve got you’ve got insight on this one. This is another big one.

Jake: So I write a like small I don’t even know if article is the right word. Like a small blurb every single Monday. that is big that just goes out to a lot of people. Sure.

Matt: It’s fantastic. Check it out. Where do the people find it, Jake?

Jake: They can find it at dentist advisors.com. If you just go to dentist advisors dot com and go to our content library, you can

Matt: We post them all, yeah.

Jake: Like see either on there and you just search my name, Jake, and you can see all of the my content. There’s probably the easiest for most people on here to find find it there but I send these out every Monday. And recently, if if anyone of these listeners reads that, you’ll probably know that I’ve been a bit obsessed with like inflation and income and things recently. Essentially, I’ve been telling a lot of people like to stop complaining about inflation, which is a really popular stance to take. You get a lot of reasonable responses when you tell they’re really

Matt: People are really happy to hear that.

Jake: happy to hear you don’t complain about inflation. And my main kind of counter argument in a recent article was because like technically most incomes are keeping pace with inflation, if not surpassing inflation. Like this is Almost why inflation is happening is because incomes are raising for most Americans, and so they’re able to pay these elevated prices, and then companies feel like they can keep charging elevated prices, and it’s kind of this endless circle because

Matt: ‘Cause people keep spending.

Jake: people keep spending. And so I’m like, even though inflation does stink, our incomes have kept pace. Anyway, I got an email back from this article, which I’m I always like about from a dentist who’s saying, I’ll just yeah, let’s just read his response

Matt: Yeah, just read it.

Jake: here. So he says in response to this article, He says this makes sense when talking to the public. Dentist clients have basically flat reimbursements while inflation despikes every other cost around them. I am a 40-year-old dentist. I’m not going to put in more hours, chair aside, because it will destroy my body. So the only hope I have of raising my income is to pay off debts. This is a weird path to follow. Watching all those costs around you increase every year. Our cap sits around 1.7 to 1.8 million in collections, I’m assuming, on a given year. we don’t care to work even harder. And we don’t care to try and keep growing. Growing would involve shady marketing companies and or increasing insurance participation and thus accepting lower fees. If we do grow, it would be to squeeze out little bits of increased marginal profit for big bits of increased headaches. I know you see this with your clients. Insurance rates reimbursements are far underpacing inflation. Growth to offset this dichotomy can’t be the solution. Your email is great for general audience, but this is what makes it hard, makes it not applicable to dentists. I’m at peace with because I’m forty and I served in the military and I’ve lived far below my means. I’m set and work is optional, but this younger generation is absolutely screwed. Is the email.

Matt: Lot of lot of generalizations there, I’d say.

Jake: A lot of things to get to. I don’t know, Matt, where do you wanna start with this? Like it’s like I mean, generally what this guy is saying is like, is dentistry still a viable career for younger dentists with inflation soaring all around us? I think is kind of he’s saying no, I think, leaning towards more no on the response to that. What would our response

Matt: Yeah.

Jake: be?

Matt: Yeah. So I guess well, easy answer is absolutely dentistry is an incredibly viable career. And we see this kind of at the national level. Clients we work with all over the country talking to younger dentists. absolutely viable care. That’s the easy, quick, simple answer. However, he what he’s bringing up is also true. And I think there’s there’s actually some realistic gripes here, concerns here. That dentistry, as anyone out there listening knows, in the dental space, it’s a unique small business compared to others that you don’t have, generally speaking, the pricing power that a manufacturing business does, or just any other business out there, even a service business. They don’t have as much pricing power while they still have l little control over general inflation in the business, let’s say it’s staffing or lab fees or whatever. So that creates a squeeze in dentistry that not a lot of small businesses face. Totally true. However, he’s making some general statements here that are, I think he’s not blaming him. I think he’s projecting a lot of like his own personal experience and extrapolating it and saying, like, this is how every everyone’s facing this. I’ll just point out a couple things. I completely disagree that growing would involve shady marketing companies andor increasing insurance participation, thus lowering fees. That statement makes it sound like that’s the only way to grow your business. As a dentist, and that could not be farther from the truth. So I’ll leave it there for a moment. I think again, I totally understand the concern, and I think a lot of things he’s saying generally are true, but there’s a lot of generalizations that are not accurate.

Jake: Yeah, I think to his point of like, hey, we’re doing one point seven to one point eight million in collections, and I don’t really have any desire to grow much beyond that point.

Matt: Great.

Jake: And so with that, my income is kind of stagnant. And but I see all around me inflation is going up. And maybe because of inflation, payroll costs for staff and employees and lab supplies or things are going up. And so not only my income, but my margins are going down because I don’t plan on going, you know, more than one point seven to one point eight million on collections. That is a fair statement. I think that’s applicable to dentistry, also applicable to any company. Like if any does if any business owner just says, I don’t plan on growing,

Matt: You’re not growing revenue.

Jake: inflation is going to happen. Right. If you’re like you just have to be comfortable with okay, this is what my income is at. I’m okay with inflation eating into some of that. That’s just more of like a personal I don’t want to grow or increase income. You to be okay that this that that their same income is not going to buy you the same things 20 years from now that it does right now. Right? You have to be okay with that. There now, to the point of we can’t grow or it’s really hard to grow. I think that’s where we have some quibbles and different ways of how to do that. for example, again, he is look looks seems like again, this person don’t really know him. but his practice seems really insurance reliant. We have a lot of clients across the country who are maybe facing the same scenario and saying, Well, okay, I’m actually gonna stop playing the insurance game as much. I am going to maybe drop some carriers or go out of network or even the big jump of going completely fee for service. That is one option where you can say, I am not growing my patient base or I am not working extra hours or bringing out an associate, but I am trying to just capture more fees for the service that I am offering. And that is a viable route that you can go is take more control of your fees, get away from some insurances. I know dentas people who are listening to this may be screaming like, well, that’s really scary and terrifying. And yes, you need to have a plan for all of that. And I’m acknowledging that there, but that is a viable option of, well, you can get away from the insurance system if you want to.

Matt: Yeah. Rabih, any thoughts?

Rabih: yes, not as dentist-specific as you guys. You guys are the experts on that subject, but it felt like there is some cognitive dissonance between the macroeconomic perspective and the microeconomic perspective. The the the dental practice is not aligned with the macroeconomic environment, as you guys have mentioned. Like choosing to keep revenue stable while inflation exists in the background is gonna crunch your margins. being dependent on insurance while You can diversify revenue streams, etc. But I want to take a step back, just bring back my statistics class for for a split second to give it in that opinion. All the macroeconomic data that we look at is aggregated, it’s the average, it’s the center of the distribution. But in reality, those data points are scattered on both extremes: the better than the average and the below them, below the average. And a single testimony about a circumvental practice. Does not have to land on that average line. It could be in those extremes. So while the average could be doing incredibly well, this does not mean that individual observations could be lagging way behind or much above that the average. And we have to take that into consideration. And if you feel like you’re falling a lot behind, you can get help. And if you’re really ahead of everyone, then share your secrets, right? Just so everyone can the average can keep sustainably going up. Just to keep in consideration the differentiation between like one observation versus the average. One observation is the performance of one dental practice. The average is the dental industry as a whole.

Matt: Yeah.

Jake: Yeah, I I think this person’s complaints are more about inflation than the dental industry, actually. Because if you just put it on its set of like, I think he’s just struggling with or trying to come to terms with, man, I’ve been making this good income for a long time. maybe my income hasn’t gone up, but now everything around me is prices have increased and that hurts to me. Like it’s a bummer that my income doesn’t go that long. Well, that applies to anybody. We still have younger dentists who are getting it in the industry right now, and they are still making good money and opening up practices. Like the best way to deal with inflation is to make a lot of money, right? It’s harder to deal with inflation if you’re making $100,000 a year. You might as well be a dentist and make three to five hundred thousand dollars. It’s a lot easier way to deal with inflation just by making more money. And we still have dentists still making five X, six X the average American. And so it’s like, yeah, dentists still make more money than the average American on average. Therefore, they are more properly equipped to deal with inflation going forward because they just make more money. and there are a ton of ways to grow your practice. Outside of like growing, growing again, we can talk about like bringing out an associate or doing all these different things again. If you count that as growing, there’s a lot of ways to do that there.

Matt: Yeah. Well, and to your point, Jake, we’re talking about two different things here. He’s saying the path to growing revenue, collections, is capped because he’s not willing to work more or grow which is fine. That’s totally fine. We actually have a qu a

Jake: I like it.

Matt: lot of dentists we talk to who are in a similar position. They don’t want to keep growing. They don’t want to add another location. They don’t want to deal with an associate. They don’t want to add shares. We totally get that. But that’s different than saying, I’m going to maintain or grow my margin. My actual profit margin. That’s those are two very different things. And you already highlighted, Jake, I can’t even tell you how many conversations we’ve had with dentists who are going out of network and taking more control over their pricing by doing a deep analysis of the reliance they have on insurance and growing their margin that way. So I also think it’s interesting, kind of it Kind of at the end, he like gives his specific kind of like, I’m good because of my specific situation, and then makes a general statement about everybody else. Yeah, like you guys are all screwed, like I’m good because of my specific situation,

Jake: He’s just worried about everyone else, yeah. Altruistic person. Yeah.

Matt: which again is there’s some irony there because it’s like, okay, but like you don’t know everyone else’s general or specific situation either, right? Type of thing. So the the the spirit of this is Jake to your point earlier, or to your over auction question. I think what he’s getting at is. His statement is kind of like everyone in dentistry screwed. This is not a viable career. I could not disagree with that more. D do you guys have different

Jake: I don’t think they’re screwed.

Matt: Opinions or any thoughts on that just specifically?

Jake: I do not think they’re screwed. We talk I talk to young dentists every day who are doing really well for themselves and making good money and have really successful practices, despite inflation and student loans going up and all these things. They are still doing really well. Especially when you compare to maybe the average American, which maybe you can lose sight of. Maybe people on these emails can lose sight of it. Just like compare yourself to the average person. Don’t compare yourself to your other rich neighbor. compare yourself to you

Matt: Yeah, look at global data for sure.

Jake: They go you look, you know, you’re doing pretty well.

Matt: Yeah, just some basic numbers. Rabih, I don’t get to you, but he’s if he’s capped at one point eight million, let’s say. Just conservatively, he’s probably bringing in seven hundred grand plus if he’s a solo producer. And he says he’s not willing to work more. I don’t know, he didn’t say how much he’s working, but let’s assume it’s four days a week. It’s not a bad place to be stuck, quote unquote, I’d say.

Jake: Nope.

Matt: Rabih, what are your thoughts?

Rabih: No, if if dentistry is not a viable career, what the heck are the three of us doing right now? You know, helping dentists

Matt: Yeah.

Jake: Exactly.

Rabih: And progress financially. So yeah, I don’t I don’t know.

Jake: I do think I guess this is a different topic. We do not need to dive into this. I know we’re at minute whatever fifty of this podcast. I do think it is hard to grow as a dentist beyond like a solo location.

Matt: To grow a business.

Jake: Yes, to grow a business like beyond a single location, like to grow into multiple providers and multiple locations. I

Matt: Yeah.

Jake: Think if you look at the margins on that, most dentists are discouraged of like, I have to actually grow this pr like the margins that you’re getting home, getting as personal income. You are introducing, as he says, a lot of headache for pretty small margins on associate led income or a psych and practice driven income. The margins are small. You as a dentist, you always make the most money on the clinical work that you are doing in the chair. And I think that’s hard

Matt: I would agree with that.

Jake: To accept for a lot of dentists.

Matt: Yeah, I agree with that. And I think a lot of times where this frustration comes from is people playing different games, looking over the fence at someone they hear about or see in the industry that that are no longer even a dentist. They’re just an entrepreneur. They built up multiple locations. They’re no longer chairside. We work with a lot of those dentists. And it’s like I can think of some right now at the top of my head where I’m like, you’re not a dentist at this point. You are a business owner in dentistry. You are an entrepreneur who’s built up a business in dentistry, and you can’t compare yourself to that person if you’re this guy and you want to be a single location owner. You don’t want to, as he says, destroy his body. He wants to just maintain a lifestyle. That is great. There’s that is there’s no problem with that. But I would dare say, Jake, to that point, there are very few careers that are better than dentistry to be able to do that, meaning work three, four days a week, run a lifestyle type practice, make really good money, pay off your debts in about ten years and run off into the sunset. Like there’s very few careers that’s better.

Jake: Yes. I think the issue does come. I love your point there of distinguishing. I think there is kind of somewhat of a cap on what you can do as a dentist. There is unlimited as a producing dentist. Yes, there is a cap there.

Matt: An actual producer? Sure, totally.

Jake: Now, if you want to break into I’m just going to become an entrepreneur and own multiple businesses in dentistry, that is almost like a different game. It’s almost a career transition,

Matt: Totally.

Jake: which we see for a lot of dentists. And that is equally as hard as building any type of business with multiple locations. There’s a lot of risk and factors

Matt: Yes.

Jake: And debt and things you have to take on. That is where I can make a sense where it’s like, yeah, those margins are slim and it’s very hard to do that. And so if you are a single location dentist who’s sitting at seven, eight hundred thousand dollars of income and saying, I want to have one point five million dollars of income, bridging that gap, I can see the argument of, yeah, this is it’s tough to do that if you are not content with where you’re at and you wanna keep growing. I understand.

Matt: We we can liken this to the financial advisor space for real. Like there’s a cap as well, maybe not as it’s not apples to apples, but there’s a difference in being a lifestyle type advisor out there, small, working with a few, you know, 50 clients, 100 clients. You just want to kind of maintain that lifestyle versus I want to go build a huge business, an RAA type business.

Jake: Yes, a company. Mm-hmm.

Matt: Two very different games. And I can sit here and tell you. Building a business in this game is in this space is really difficult. It’s very stressful. Margins are not always like it’s hard. So it’s the same kind of thing. let’s get Rob

Jake: And this is defining this comes back to a classic just defining what you want out of your career, right? And what you want your income to be. And then we

Matt: Exactly. Yep.

Jake: Can set realist realistic expectations around those things.

Matt: Totally. Rabih, let’s get you in here. Any thoughts?

Rabih: No, I think you guys covered it all. D and that this distinction you did at the end that probably dentistry is not a viable option for that specific lifestyle just hits the nail in the right place. It is a very viable career path for people who are always ready to push the boundary and scale in the most economic efficient way. And if that means putting in more work and adding more chairs and bringing associates and becoming an entrepreneur, then that’s the answer.

Matt: Yeah, yeah, totally agree. Yeah, dentistry is still very, very viable. It’s it’s it’s

Jake: It’s so awesome. It’s really good.

Matt: an awesome career. We’re you know, we have twenty five, twenty what, twenty-seven now people over here, dentist advisors all sitting here thinking, Man, should have been Dentist. Dang it.

Jake: Yeah.

Matt: okay, any other comments, words of wisdom, thoughts on any of the things we’ve covered, guys? No, feeling good? We’ve exhausted our wisdom today. okay. Well, if you’re out there listening, still listening, you’re one of the cool ones. We appreciate each and every one of you for being here. Hopefully we’re adding some value. And again, if you’re looking for more specific advice, dentistadvisors.com click on the book free consultation button. Happy to help you walk through all aspects of your financial life and answer any questions that you have. So for now, Rabih, Jake, thanks for being here. Everyone, thanks for listening. Till next time, take care. Bye bye.

Keywords: umbrella insurance, retirement planning, asset allocation, inflation, dental professionals, financial advice, risk management

Insurance, Practice Management