How to create wealth in perpetuity
Famed children’s book author Shel Silverstein penned a book whose meaning has kept readers guessing for nearly six decades. The Giving Treethe 1964 children’s classic still found on bookshelves of first-grade classrooms around the country, tells the story of a boy and his bond with a particularly generous apple tree.
Once content with the ample shade and fruit the tree graciously supplied him in his youth, the boy grows up and wants more. Aside from the apples, he wants the branches to build himself a house. Then tragically, he chops down the entire trunk to make a boat. He’s ultimately left with nothing but a stump on which to rest his old and feeble body.
Some readers view the book as a testament to the selfless love that parents bestow upon their children. Others see it as a metaphor for overindulgence and the importance of setting boundaries. Environmentally conscious readers consider it a lesson on the necessity for preserving nature.
Financial advisors like myself have a more practical take on the timeless tale. I interpret the message in much simpler terms—whatever you do, don’t cut down your apple tree. Sacrificing the entire tree’s livelihood undoubtedly results in short-term gain for the story’s nearsighted protagonist. I advise my clients to instead use their tree to propagate an entire orchard, one that will sustain them abundantly in perpetuity.
You want to become a true entrepreneur
If you’re a chairside dentist who owns your practice, you might already consider yourself an entrepreneur. Not so fast! Do you pay yourself four ways, or like most people, do you collect a weekly paycheck based solely on the services you render? If it’s the latter, then you’ve merely bought yourself a job. When it’s time to retire, you’ll be forced to cut down your apple tree. Let’s hope it’s a big one!
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After selling your practice, you’ll have the proceeds to sustain yourself, along with whatever nest egg you have stashed away in your investment accounts. Depending on the lifestyle you’re accustomed to, that money could all but vanish in less than 10 years, which means drastic cuts to your standard of living. If you’re anything like my clients, you’ve worked way too hard to succumb to retirement in a one-bedroom condo, drinking cheap wine, bad beer, and tasteless coffee.
You owe it to yourself not only to retire on schedule, but to do so in comfort. With a little wherewithal, you can create a legacy of generational wealth in the process. I coach dentists on building a business that ideally pays them four ways. Maybe not all at once, but in time, you can leverage three powerful streams of income in addition to your salary as a practitioner.
Be paid four ways
Perhaps my favorite way for my clients to pay themselves is via real estate, specifically by purchasing the property on which they practice. The tax advantages and potential for long-term appreciation provide plenty of reasons to stop paying rent and instead assume a mortgage. Simply owning the building outright when it comes time to sell your practice could net you double or triple what you’d otherwise receive. If you structure the deal properly, you can retain the real estate and collect sizable rent payments for as long as the earth revolves around the sun.
I have several clients based in New York and California who had the foresight to purchase their office spaces 30 years ago. In many cases, their land alone is now worth twice as much as their multimillion-dollar practices. If you like property as an investment, keep in mind that numerous additional real estate avenues can grow your money in ways that far outpace the nominal gains you can expect to make in the stock market. Building a solid relationship with a knowledgeable financial advisor will go a long way in giving you the acumen required to negotiate the right transactions.
In addition to your role as a dentist, you’re also the captain of your ship. You’re responsible for proper patient care as well as the successful management of the entire team. CEOs collect a management salary in addition to remuneration for their day-to-day job duties. In other words, you not only need to be paid for the work you provide your patients, but you should also earmark compensation for the work you do in maintaining operations behind the scenes. You deserve pay as CEO in direct proportion to your managerial performance. Otherwise, you’re doing that part for free, which means that something about your business structure is off kilter.
As you may have guessed, some practitioners eventually give up chairside dentistry in favor of focusing all their attention on managing their growing enterprise. They leverage their time by bringing partner dentists into the fold. Not surprisingly, you stand to make more money running a properly leveraged business than you would if you simply remained tethered to a chair.
When my clients understand the bigger picture, a lightbulb flips on in their heads. At that point, I know they’re ready to shift their attention to the fourth income stream, which revolves around being an owner. That’s true entrepreneurship. Until this point, everyone else is a “wantrepreneur,” a term coined by famed mogul Mark Cuban. Owners receive dividends and profit share solely based on their stake in the business. Savvy entrepreneurs understand the importance of reinvesting those dividends to further grow their business.
As a stakeholder, maybe you’re entitled to $100,000 in annual dividends. However, because of the advice of your financial coach, you have the fortuitous perceptiveness to hold off on pocketing that money. Instead, you reinvest it in new technology or additional staff. As a result of that calculated investment, business explodes, and future annual dividends double to $200,000. Talk about leverage! Such prolific investments should make any business owner think long and hard before automatically funneling earnings into a traditional retirement account.
It might seem as though I completely eschew typical investments such as stocks, CDs, and mutual funds. I do not. They serve a purpose, and in fact many of my clients invest in all of them, albeit judiciously. They provide predictable returns in the long run, but their potency invariably erodes over time due to inflation, unlike my favorite aforementioned revenue vehicles. Like a healthy apple tree, they bear copious amounts of fruit continuously for as long as you maintain them, regardless of inflation, and more importantly, regardless of your presence beside the chair.
You aren’t going to be a practicing dentist forever. It’s impossible. You have no choice but to leave daily practice behind one day. But you can remain in a strictly managerial role for much longer. You can hold onto your real estate gold mine and collect rent checks forever. The same goes for your business holdings. You can retain a portion of your stake in the thriving practice that you built from the ground up. Structure the deal properly, and you’ll have no reason to chop down your orchard. On the contrary, you’ll eternally reap its rewards.
Author’s note: The ideas presented here require precision in their execution. Proper guidance is strongly recommended. If you would like to explore these options in greater detail, my team and I are eager to hear from you. Call us at (973) 422-9140 or email us at [email protected].
Editor’s note: This article appeared in the September 2022 print edition of Dental Economics magazine. Dentists in North America are eligible for a complimentary print subscription. Sign up here.