December 31, 2018

Your Top 2% Income Status Provides a False Sense of Financial Security

As is common during the year-end holidays, this is the season to be grateful for what has gone well in 2018. It is also the season to contemplate what to improve over the coming months and beyond. By this stage, you should have a solid grasp for how production, collections, and income will finish the year. As you review your finances, determine whether your current financial strategy is built to last given current trends and the challenges facing dentistry today. If it is not, commit to a solution as part of your resolutions for 2019.

As a practicing dentist, you likely pay more in income taxes each year than many Americans earn. If your practice grosses $1 million or more per year, particularly as an owner or co-owner, you likely owe five to 10 times more in taxes than the average American’s annual salary. Your diligence in completing dental school, succeeding as an associate, and flourishing as an owner has allowed you to achieve, in many respects, the American dream.

Some people may put you on a social pedestal for earning more than 98% of your fellow Americans. Others may begrudge your place in the top 2%. Regardless of societal perception, the fact is that you earn a lot of money relative to others in this country—and the world. Life is good! Because you earn a lot of money, additional adjectives apply to you. You are affluent, wealthy, prosperous, loaded, rich. Because you earn a lot of money, some assume that means you have saved a lot of money. Your net worth must also be among the top 2%, or at least headed toward that level, right? Or, perhaps, you have spent much of what you’ve earned? Are you fully aware of what your net worth is relative to where it needs to be so that once you stop earning income you can maintain your lifestyle?

According to a national study conducted in 2015, the average income across the top 2% of US earners was $206,000.1 Among those with high incomes, earnings varied considerably by gender and by state. Specifically, the top 2% of high income–earning men made $371,000 and the top 2% of high income–earning women made $145,000. Across the country, location definitely mattered insofar as the level of earnings required to land within the top 2% of your peer group. In Washington DC, one had to earn $379,000, though in several states one only needed to earn $150,000 to qualify as an income elitist.

A summary of earnings in dentistry was presented by Jared Kaltwasser in Dentist’s Money Digest.2 In citing data from the Bureau of Labor Statistics (BLS), Kaltwasser writes, “[A] general dentist earned about $166,000 annually in 2015. For comparison purposes, the BLS estimate is slightly lower than the $174,000 average the American Dental Association found in a 2014 survey of its members. The ADA data also show that dentists who own their practice (either as a solo practitioner or partner) earn nearly $50,000 more than dentists who are employed.”

Based upon this research, owners of general dentistry practices earned between $216,000 and $224,000, on average. As is the case for all workers, earnings vary by state. Yet, in all cases, dentistry pays very well. Even if you do not feel like you are in society’s upper economic echelon, you are, according to the facts.

So, why do so many dentists tell me that money is one of their biggest worries? I hear it in person at conferences, through phone calls in response to published articles and podcasts, and from emails shared with financial advisors on my team. Financial stress is a reality for many dental professionals. What’s more, that stress often is justified because most of them are financially unprepared to maintain their standard of living throughout their retirement years.

In 2010, the American Dental Association published survey results showing that the average of all dentists’ (regardless of marital status or other demographics) household income was $258,000.3 The same survey respondents planned to take retirement income of $127,000. Respondents expected nearly two-thirds of their annual retirement income, or roughly $79,000, to come from their investment portfolio. In financial planning, a frequent rule of thumb is that up to 4% of investment assets can be withdrawn each year over a 30-year retirement without a retiree facing much risk of running out of money before running out of time. At that withdrawal rate, generating $79,000 per year in spendable income requires a $2.5 million portfolio, allowing for $100,000 of pretax withdrawals.

Returning to the survey respondents, whose average household earnings were $258,000, we must remember that an estimated 25% of that amount is for federal and state/local taxes, so net income to spend is just more than $193,000 per year. For a surveyed dentist expecting retirement income of $127,000, including Social Security, less roughly 20% in total taxes, there will be $102,000 per year to spend. Even without a calculator, it’s easy to recognize this dentist will face a shortfall of $91,000 per year in discretionary income between his or her working years and retirement years. To avoid the shortfall—for instance, by increasing retirement income to the same level as current earnings, $258,000, and allowing 62% of that to come from a portfolio—$160,000 of pretax income is now needed. Pretax withdrawals of $200,000 (or 4%) would net $160,000 per year from the portfolio, requiring a $5 million nest egg at retirement. So . . . what part-time or full-time job do you think will best meet this dentist’s definition of retirement? If you are in a similar situation as the average survey respondent, concern about your financial health is entirely reasonable.

As you review your finances for 2018 and perhaps discover you are, in fact, counted in the top 2% (and maybe even top 1%) of income earners in America, look at your personal net worth statement and identify where it stands. Having a net worth, however, in the top 2% of Americans is not the objective, as it’s only necessary to accumulate enough wealth to meet your family’s long-term goals. If your goal is simply to maintain your lifestyle throughout retirement, then your net worth must support that goal. If your goal is to spend comfortably and leave an inheritance for your children and/or grandchildren, then your net worth must cover that goal. If your aim is to leave a legacy for charitable organizations once spending and inheritance goals are met, then your net worth needs to be large enough to reach those ends.

Lofty income this year will not result in a prosperous financial lifetime unless goals are set, you craft strategies to reach those goals, and your plan is implemented. If you apply an appropriate savings and spending strategy while continuing to be a top-2% earner, your financial future may be bright indeed.

This commentary originally appeared December 1 on

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About the Author

Rob Ziliak

Chief Experience Officer

Rob serves as the Chief Experience Officer for Buckingham Strategic Wealth, leading the firm’s strategy to help every client feel as if they were our only client through a deeply personalized, holistic, planning-centric experience. His pursuit is to continuously improve the breadth and depth of resources available to clients, while also making it as easy as possible for clients to engage with their advisory teams. Rob, who holds the CERTIFIED FINANCIAL PLANNER designation, earned his bachelor’s degree from Indiana University and his master’s degree in personal financial planning from the College for Financial Planning.