Assumptions and methods

Methodology

What this measures

What the savings you already hold, what you add each year, and what your practice sells for could pay you as annual income before tax once you retire, with Social Security covering part of that income once payments begin, and what is left of the portfolio each year through age 90.

How the figures are worked out

• The portfolio is all stocks until three years before retirement, then shifts to the final mix and holds it.
• Each year’s return = that year’s stock weight times the stock return, plus that year’s bond weight times the bond return, plus any remaining weight times the cash return, less that year’s stock weight times the stock funds’ expense ratio.
• The stock and bond returns are stated before fees. The firm’s advisory fee and the stock funds’ expense ratios are deducted within the calculation; the portfolio projection reflects those deductions.
• Each quarter, one quarter of that year’s saving is added at the start of the quarter, and the balance grows at (1 + that year’s return) raised to the one-fourth power, minus one. The advisory fee for the quarter — one fourth of the yearly fee under the firm’s standard schedule, worked on that quarter’s average balance — is then deducted, in arrears.
• Saving steps up with inflation at each year boundary, so the amount entered keeps its purchasing power for the whole projection.
• Every figure is shown as calculated, in the dollars of the year it falls in; the at-retirement figures are stated in the dollars of the retirement year. The optional today’s-dollars view restates every figure in today’s purchasing power, each converted at the inflation assumption from its own year.
• The practice sale price is entered in today’s dollars and carried forward to the retirement year at the dental-services inflation rate.
• The tax adjustment = the sum, across the parts of a sale, of each part’s share of the price times the tax rate that applies to that part. It is applied to the carried-forward price, and it is a planning figure rather than a tax calculation.
• Portfolio value at retirement = the projected savings balance plus the practice sale proceeds after that adjustment.
• The Social Security figure entered is multiplied by twelve and carried forward at the inflation assumption to the age payments are assumed to begin, and it keeps growing at that same rate through retirement.
• Where payments are assumed to begin before the retirement age, each working year from the claim age adds that year’s benefit to the saving, after tax at the published top-bracket ordinary rates.
• Annual income, before tax = the portfolio value at retirement times the withdrawal rate, worked once at each rate offered. That planned dollar amount is not recalculated from the balance each year, and it is not increased with inflation.
• Before Social Security payments begin, the portfolio is drawn for the whole planned income. Once they begin, the draw is the planned income minus that year’s benefit, never below zero, so the draw falls a little each year as the benefit grows.
• Where the benefit alone exceeds the planned income, nothing is drawn from the portfolio and the income that year is the benefit itself.
• Each year of retirement, one quarter of that year’s draw is taken at the start of each quarter, the balance then grows at the final-mix return, and the same quarterly advisory fee is deducted. A year’s draw is limited to what is left, so an exhausted or partly funded year pays less than planned and the tables say so.
• The projection runs from your age today to age 90. The summary table shows the balance at the retirement age and every five years after, ending at 90.

Where the numbers come from

• Returns: stocks 6.5% a year and bonds 3.75% a year, before fees and inflation. These are the firm’s own long-term planning assumptions, not a published third-party forecast. The firm’s advisory fee, at its standard schedule and quarterly in arrears, and the stock funds’ expense ratios are deducted within the portfolio projection; the firm assumes the schedule and the expense ratios will remain the same through the entire projection term.
• Inflation: 2.5% a year, the firm’s long-term assumption. It steps up what you save before retirement and grows the Social Security benefit, before and after payments begin.
• Practice sale inflation: 3.5% a year, applied to the sale price only. Practices are priced as a share of collections, collections track the fees a practice charges, and the firm takes the long-run rate of change in published dental-services prices as the closest available measure of that. It is a proxy, not an index of what practices sell for.
• Withdrawal: 4%, 5% or 6% of the portfolio at retirement, worked once as a fixed annual amount. Before Social Security payments start, the portfolio covers the whole amount; after they start, the benefit takes over part of it, and what is actually paid in any year is limited to what the balance can fund. The 4% anchor is a long-standing planning convention rather than a published standard; the higher rates are the firm’s own planning judgment, and a heavier draw leaves less, which the chart and tables show.
• Practice sale tax: a planning adjustment of 26.4% of the sale price, built from the way a dental practice sale is typically allocated and the tax rate that applies to each part. It assumes no cost basis and top tax brackets, both of which push it high rather than low.
• Social Security: the figure in the form starts at $4,152 a month, the published maximum for someone claiming at full retirement age. It is a starting point to edit, not a projection of your own benefit, and the model starts it at 67. A benefit received while still working is saved into the portfolio after tax, at the same published top-bracket ordinary rates the sale adjustment uses.

What this does not cover

• Income tax on the income shown. Every income figure is before tax, including the Social Security line; the one after-tax figure in the model is a benefit received while still working, which is added to saving net of the published top-bracket ordinary rates.
• The choice of when to claim Social Security. The benefit is assumed to start at the age named in the assumptions; claiming earlier reduces it and claiming later increases it.
• The specifics of a practice sale — how the price is allocated, how the deal is structured, and which state you are in. Each one moves the after-tax proceeds, and the adjustment here is a planning figure rather than a tax calculation.
• The formula actual Social Security increases follow. The benefit here grows at the firm’s inflation assumption; the Social Security Administration sets actual annual increases by its own rules.
• Pensions, annuities, rental income, and the sale of a building.
• Which accounts the money sits in, and the order it would be withdrawn from.
• Roth conversions, required minimum distributions, Medicare premiums, and state tax.
• Any year-by-year variation in returns. The projection applies one steady rate.