Young Doctors - Don't Lose $4 Million to The Lost Decade!
Dentists are purchasing practices much later than previous generations, scared by dental school debt and corporate groups making big promises to work elsewhere. However, waiting is a deadly financial mistake that young dentists need to avoid!
Young Doctors- Don’t Lose $4 Million to The Lost Decade!
We’ve all heard the rumors over the last five years that practice ownership is down and young doctors aren’t buying practices! Is there any truth to this? While there’s some truth, the situation is not what it seems on the surface. The ADA’s Health Policy Institute completed a study of more than 55,000 dentists last year, analyzing ownership trends of doctors in various career stages. What they found was not that doctors don’t want to purchase practices, but rather that doctors are delaying practice purchases, enduring what we refer to as the Lost Decade.
The Findings
Overall, male dentists are almost as likely to own a practice 15 years or more removed from dental school whether they graduated in 1991 or 2010. Those graduates between 1991 and 1995 have an ownership rate of 90% 15 years removed from graduation and graduates between 2006 and 2010 have an 88% ownership rate 15 years removed from graduation. That’s great news for doctors looking to sell!
However, the study highlighted a disturbing trend that needs to be reversed. Only 21% of graduates (male and female) between 2016 and 2020 now own a practice, with males owning at a rate of 30% and females at a rate of 14%. If the trends continue, this cohort will eventually own practices like their more senior colleagues.
The real problem is the difference in ownership between 5 to 9 years out of dental school, or the Lost Decade. Doctors graduating 2010 or prior had an ownership rate of over 63% or higher 5 to 9 years removed from dental school, compared to only 33% for those graduating from 2011 to 2015 and only 21% for those graduating from 2016 to 2020.
Why the Lost Decade? Simple, most practice owners pay off their purchase loan over 10 years, meaning more than 70% of young dentists are wasting an entire decade prior to seeing a true return on investment from their education. It’s easy to see how young dentists could be scared, with the median price of a home in America doubling over the last decade, dental school costs (and student loans) soaring, and bad actors convincing them their only option is to work as an associate for corporate.
Let’s run through an example to illustrate just how far behind this decade can make young doctors. Assuming a practice has $1,300,000 in collections with roughly $910,000 of doctor production, an associate would make roughly $300,000 annually. After accounting for maximum 401(k) salary deferrals of $23,500 and federal and state income taxes of $67,000, the associate would take home $210,000, or $17,500 per month. Not too shabby 10 years ago! If we take into account $3,000 per month for student loans, $5,000 per month to own a home including mortgage, taxes, insurance, repairs, we’re only left with $9,500 per month. Any other expenses? Car payments? Private School? Vacations? As you can see, there’s little if any leftover to be saved.
The Solution
The reality is that young doctors cannot afford to not purchase practices, and the sooner the better! Assuming the same practice with an average overhead percentage of 60%, there would be $520,000 of profit as an owner. The loan payments (assuming an interest rate of 5.25% and a $1,000,000 purchase price) would equal $128,750 per year for 10 years while federal and state income taxes would be approximately $75,000 assuming salary deferrals of $23,500 for both the doctor and spouse. This would leave take home pay of $269,250, while saving $47,000 annually into the retirement plan versus $23,500. This leaves us with approximately $270,000, or $22,500 per month left over.
Results
Assuming the same personal living expenses, the associate saves $23,500 annually, while the practice owner will save $107,000 annually, a difference of $83,500 each year! Over 10 years, assuming a 7% investment return, this would be over $1,150,000 of additional funds for retirement for the owner! Moreover, the owner would also own their practice outright, allowing them to save the additional $128,750 (practice purchase payments) for the following 10 years. Over 20 years, this difference would be over $4,000,000, an absolute staggering advantage for practice ownership!
What Can You Do?
Make sure that new dentists are receiving the right information! Are you in the dental school talking to the next generation? The DSOs sure are, and they certainly aren’t explaining this. Students can receive a complimentary membership to our newsletter and our team is always happy to present to young doctors to spread the message. Let us know how we can help.