Steve Steinbruner

Debt can create a wide range of emotional reactions - no doubt about it. According to the ADA news, the total cost of a dental eductation- the sum of tuition, mandatory general fees, instruments, textbooks, health service fees, and other costs for all four years - has risen consistently over the past 10 years. Costs for residents, among all United States dental schools, increased by 87 percent, from $78,835 to $147,409 while non-resident costs increased by 81.1 to $206,423. This debt drags behind it emotion, fear, and pressure that can cloud logic and impede objectivity when it comes to balancing debt and savings for retirement. Most stories support my "debt-averse" hypothesis.

First, make a distinction between bad debt like high interest credit cards and good debt like low interest student loans or debt from business re-investment. A professional, with high income capability, must take a more balanced approach through proper leveraging because of their special retirement circumstances and needs. Because of this, debt must be structured to allow you to save some money while you pay it back. In addition, dentists generally have a shorter working career and exist in a cash-based business model with hopes their practice will sell for more than it will in reality. Waiting to save until after you pay off debt is not a winning proposition - trust me. I see this all the time and not through glasses streaked with emotion.

From a structure standpoint, a dentist needs to properly leverage their debt to take advantage of an old adage: "the time value of money". The last decade in the stock market returned a whopping, cummulative 0% so there should always be a pragmatic focus on saving more money over home run returns in the market. Over the long-haul; however, most money doubles about every 10 years with a 7% return. The sooner you get serious about saving, the better off you are. This is why you hear that saving "the first million" is the hardest . . . after you have built that nest-egg; you should have the second million after 8 years, though the first million may have taken 10-15 years to attain. As you can see, making up for lost time - when you consider the time value of money - can be a costly endeavor.

Let's consider a a dentist has variety of practice loans with anywhere from 1 to 7 years left on the terms. There is a total balance of $500,000 and a monthly payment of $10,000 (therefore, there is $120,000 that is paid on these loans in a given year). If the dentist were to refinance this debt to a new $4,000/month payment over a longer repayment schedule, there is essentially $6,000/month in additional income each month that would be available to him/her. If that $6,000 per month difference was invested for 20 years, the dentist would have approximately $4.0 million (assuming a 9% rate of return). However, if they had employed the "debt first" philosophy and paid everything off before starting to save, they could invest $120,000 per year after the 7 years of payments have been paid. This would leave the "debt first" dentist with approximately $2.9 million after 20 years. There is a $1.0 million difference between both options-therefore, you could be making a million dollar mistake from not properly leveraging the existing practice debt! Based on most dentists' needs, that just delayed their retirement another 3-6 years.

The extra interest on the longer loan in this example is around $350,000 - still leaving the properly leveraged dentist $650,000 ahead of the "debt first" dentist (or 24% more money). Also, remember that additional $350,000 in interest is deductible anyway, so you can at least write it off through your practice. You might consider the "real number" after taxes. In other words, $350,000 deducted from corporate taxes is actually a "real cost" to the dentist of about $260,000.