Dentists face financial challenges unique to their profession. Although dentists are generally considered to be “highly compensated,” that compensation does not necessarily guarantee financial security.

Dentists face several obstacles that may prevent them from amassing enough wealth to maintain their lifestyles after they retire. These issues should be addressed and actively managed to increase the probability of building enough wealth to retire comfortably.

According to the American Student Dental Association, the 2016 dental graduating class had an average educational debt of more than $261,000. Considering the modest salaries – less than one-third of their student loan debt – earned during residency, this is a significant burden. In most cases, dentists defer making payments on their dental school debt until after they complete their residency. Meanwhile, the interest continues to accrue and the debt increases.

The significant cost of servicing dental school debt dramatically reduces disposable income and in many cases prevents dentists from adequately saving for retirement. Depending on the payment plan, it is not uncommon for dentists to be well into their 30s or 40s before they finish paying off their educational debt. Therefore, assuming a retirement age of 65, many dentists experience a compressed period in which to fund their retirement needs.

Most dentists are compensated based on production. Unlike their peers in other professional services industries, tenure and longevity do not equate to higher earnings. In fact, it can become increasingly difficult to sustain the hours and demands required to maintain their compensation over the course of their career. It is also very difficult to gradually reduce hours and take on a part-time role as the costs of support staff and resources are significant so most clinics require a full-time commitment.

According to the American Dental Association, inflation-adjusted income has decreased after peaking in 2005. This is an alarming trend because, as income has flat-lined, the cost of dental school has steadily increased.

Fortunately, when dentists retire, they can typically generate income by selling their practice, with an established client base, to support their retirement spending needs. Dentists can expect to receive about three times their annual salary upon the sale of their practice. Although selling a dental practice is helpful, the proceeds from the sale are generally inadequate to support a similar lifestyle throughout retirement.

Despite this seemingly bleak outlook, there are several actions dentists can take to help improve their probability of retiring comfortably and a host of factors to consider when determining the optimal approach for retirement saving.

Balancing Student Loan Payments and Retirement Savings

The first step is to develop a plan to balance debt repayment and retirement savings. The after-tax interest expense of the education debt should be compared to the expected return of investing for retirement. Retirement deferrals reduce income and can potentially reduce the overall tax burden, especially if they prevent the onset of the Alternative Minimum Tax (AMT).

Many retirement plans include matching contributions that immediately generate a positive return on deferrals. For example, a 50% company match generates an immediate 50% return on money invested. Clearly, in this case, it is not advisable to forego the match to repay student debt as the interest rate on the debt is minimal compared to the after-match return. A majority of discretionary income should be allocated toward the option projected to provide the best net return.

Regardless of how the investment industry promotes performance, when it comes to saving for retirement, the time and the amount saved has the biggest impact on establishing a sufficient retirement fund. For example, $1,000 invested each month for 40 years at a 6% annual return grows to more than four times as much as the same amount invested for 20 years at the same rate and nearly twice as much as the same invested over 30 years.

Establishing a Lifestyle for the Long-Run

Since dentists may not be able to count on rising incomes as their career progresses, they should focus on establishing a lifestyle that allows them to save an appropriate amount toward retirement as early as possible. Dentists should consider working with a financial planner who can help develop a plan, create a budget and define the amount needed to save for retirement.

Choosing the Right Retirement Plan

Several types of retirement plans, by design, allow business owners and highly compensated individuals the ability to contribute more than traditional retirement plan annual limits. In general, cash balance plans work best for those who want to save more than $60,000 a year for retirement, employers who are already contributing or are capable of contributing to all employees, and partners or owners over the age of 40 who want to accelerate retirement saving. Cash balance plans support tax-deferred savings, provide asset protection and allow for accelerated retirement savings. Therefore, dentists are good candidates for cash balance plans since the benefits address several of the unique challenges dentists face in saving for retirement.

Saving for retirement is a difficult and long journey, but dentists can take action to greatly increase the likelihood of achieving a successful retirement. Developing a plan and saving early will give dentists the opportunity to accumulate enough wealth to retire comfortably. As business owners, dentists can also address retirement savings at the plan design level and utilize options that encourage pre-tax savings and tax-deferred growth. Although saving for retirement isn’t easy, a proactive approach and the assistance of outside professionals should reduce the anxiety and stress and greatly improve the prospect of meeting retirement goals.

This post was originally published on August 8, 2016. It was updated on April 3, 2017 to provide you the most current information.