I graduated from dental school with $300,000 in student loans. Nearly two decades later, I’ve learned about the 4% rule, the financial independence (FI) number, and dying with zero thanks to The White Coat Investor. When I evaluate my financial position, I am FI. Well, sort of. It’s not that straightforward. Although my strategy for building wealth has been simple, divesting is complicated and expensive. In this post, I’ll share my journey. Hopefully, what I share will help you reach FI and avoid some of my constraints.

Here is a disclaimer: As I share an opinion on this nuanced topic, I want to underscore that my success could not have occurred without amazing parents; dedicated coworkers, partners, and friends; luck; and the blessings of heaven.

Huge Amounts of Debt

If you are reading this blog, you might already know what -$300,000 feels like. It is really easy to get there. I was 21 years old in April 2004, when I gained acceptance to the University of Southern California School of Dentistry, later renamed the Herman Ostrow School of Dentistry (more on that later). This marked the culmination of a five-year plan crafted at age 16 with my dad. I was thrilled when I received an email saying, “Welcome to the Trojan Family!” USC was my first choice. Not only was the Los Angeles weather spectacular, but USC had recently adopted a problem-based learning (PBL) pedagogy that eliminated most lectures and allowed for case-based learning in small groups.

There was a risk to attending USC, I learned, while visiting for my interview. It had just surpassed NYU as the most expensive dental school in the country. I was blown away by the cost of tuition (~$60,000 per year, as I recall), and I knew this would greatly impact my family and our financial future. I consulted with my dad, a successful dentist who anxiously anticipated the day I could join him in his practice. I knew he earned a comfortable living, but he never told me how much money he made.

I had previously benefited from his financial savvy. During undergrad, he graciously covered the difference in tuition and living expenses that I did not have covered with scholarships. I was appreciative and frugal. This allowed year-round enrollment. I graduated four years after high school, even though I paused my studies to serve a church mission for two years in northern Spain. (Perhaps I’ll write a future post about how to graduate college at light-speed, including the pros and cons.) My father encouraged me, and ultimately, I decided to enroll at USC.

While in dental school, my wife and I didn’t have an opulent lifestyle. However, we splurged on the student pass for football games (~$150) to watch Matt Leinart, Reggie Bush, LenDale White, and others. I have no regrets about that, even if it increased my student loan amount. We occasionally “lived large” by going to El Pollo Loco, In-N-Out Burger, or other fast food restaurants. Credit card expenses were paid off monthly. My wife worked as a CNA while completing nursing school with a full-tuition scholarship. We incurred a couple of major medical expenses when our son was born and when I was hospitalized for 10 days with an ileus secondary to Epstein-Barr virus. (I don’t know why so many people say, “No offense, but I hate the dentist!” They must have never had the pleasure of having an NG tube or a catheter placed by a nursing student. That was a humbling experience as a 22-year-old professional student.)

We had support from our families. My rapid completion of undergrad meant I had some college funds remaining. Our parents kept us on their family cell phone plan, eliminating that expense. At least annually, my in-laws brought down some Idaho potatoes and onions from their farm. In spite of this, we finished USC with $300,000 in student loans and moved to Idaho to practice dentistry.

Back to Broke

To get back to broke, I had to eliminate my student debt. To tackle $300,000 in student loans–which pales in comparison to today’s projected cost of attendance at Herman Ostrow School of Dentistry of USC (~$600,000)–I set out to increase my cash flow by paying off some loans. I had 6-10 different loans at rates ranging from 2.875%-8.5%. I saved money until I had enough to pay off a loan in its entirety. I began with the highest interest rate loans with the lowest balance. It was very satisfying to eliminate loans and see my cash flow increase.

In addition to aggressively paying down student loans, helping me get back to broke 2-3 years after dental school, I actively increased my skillset through continuing dental education. I completed several hundred hours within two years of graduating. This resulted in better and faster care, an expanded scope of services, and increased income. On that note, I highly recommend new graduates seek employment opportunities that provide mentorship and a wide breadth and depth of opportunities for continuing education. This may require an employment contract requiring several years' commitment. But good employers will want you well-trained, and they will support you as you develop your skillset.

Aside from aggressively paying down loans and investing in continuing education, I worked extended hours, seeing patients as early as 6:30am and as late as 7pm. Seventeen years and four kids later, my wife told me that she felt like a single parent on a lot of those nights. I know this probably pales in comparison to what physician families endure, but my point is that there was sacrifice for me, my wife, and my children–certainly more than an average dentist’s career. My parents helped by allowing us to rent a home from them at a discounted rate. Luckily, the housing crash resulted in a discounted price on our first home. In retrospect, I should have bought 3-4 homes.

Eighteen months after graduating, I bought into the practice with 100% financing. This increased my income and responsibilities while adding a new debt with a higher interest rate. I began aggressively paying down my business loan instead of my student loans, which had a balance of about $150,000. Eventually, I paid off the practice loan and student loans with interest above 2%. I still have one student loan left. It is at 1.87% interest. It will disappear after a few more payments.

More information here:

A Dental Career Reimagined — I Thought I’d Be Rich But I Found Wealth in Another Way

Is Dentistry Worth It? Comparing It to Being a Pediatrician, a Planner, and a Plumber

From Back to Broke to FI?

The journey from back to broke to FI has been a wild ride. I’m not sure when I reached FI, but I got there by investing nearly all earnings and efforts into the practice. Although I’ve picked up a few real estate holdings along the way and contributed to retirement accounts, the greatest contributors to my net worth are my practice and primary residence. This was mostly intentional. I was building on the legacy my father started. I took what he built and tried to make it bigger and better, and to impact my community positively. However, it came with sacrifices, and it has limitations.

Consider the true cost of generating lasting wealth through a healthcare practice. One cost is stomach lining. Over the course of my career, I feel like I’ve seen it all. I’ve seen my heroic, kind, generous, and gracious father/mentor be unjustly criticized by a peer, which led to a two-year lawsuit. I’ve brought on partners. We’ve expanded to multiple locations. I’ve seen dentists navigate malpractice suits, handle ridiculous complaints to licensing boards, multiple employees attempt embezzlement (some were prosecuted), every other kind of employee/HR issue, retention and recruiting issues, and facility and equipment management issues. I’ve been an expert witness in cases for both the defense and the plaintiff. The list is comprehensive; it has been a wild ride.

The result of those efforts, the day-in and day-out resilience, has resulted in the value of the practice being more than 12 times higher than when I bought into it. Crunching the numbers, I’m FI. Or am I?

I believe if I sold the business, downsized our home, subsequently invested in the market or real estate, and employed the 4% rule, our annual withdrawals would exceed our annual spending. Together, they add up to the FI number (25 times annual spending). That’s a lot of consolidation of risk and power in two assets! Many people say a home is not an asset. However, it becomes an asset when converted to cash. My financial advisor gently told me I’m not financially independent and I can't retire early without liquidating. On paper, I am free. In reality, I may be trapped by my own assets.

What happens when you make those paper dreams a reality? Consider the cost, i.e., taxes, if I sold my business interest. Selling creates an immediate decrease in net worth due to taxes and fees. Brokerage fees are around 10%, and taxes depend on the allocation of the purchase price and basis. Unfortunately, there is no such thing as a 1031 exchange for a dental practice. Regardless of the blood, sweat, tears, and capital I’ve invested, my accountant tells me to expect a seven-figure tax liability if I sell today. Downsizing my primary dwelling will also trigger a significant tax burden. This is because the gain on a primary residence is subject to capital gains taxes when above $500,000 (Married Filing Jointly). Don’t forget real estate commissions and closing fees. Of course, all the taxes and fees would be paid by the proceeds of the sale. However, this means less cash in the bank.

While my investment vehicle has mostly been a dental practice, I’m not sure I’d recommend it. It is illiquid, and dentists may want to diversify into more than a legacy business. Also, consider avoiding building a “forever” house that will retain untapped equity and require money for taxes and maintenance.

A few of the takeaways as I evaluate my current blessings and restraints:

  1. A dental practice is not a passive business and does not have special tax treatment like real estate.
  2. Every dollar you receive from dentistry is a result of services provided.
  3. It is very challenging to be both a clinician and the business owner. Most dentists are not trained in business. The dual role drives some mad, and it is evident in the proliferation of DSOs. I have anecdotal evidence, as well. For example, my practice has employed about two dozen dentists over the last 20 years, including the 11 who are currently active. Those who leave usually chase the dream of practice ownership. One bought a practice and subsequently sold it to a DSO within a few years. He again works as an employee. Another dentist eventually purchased a practice and continually struggles, like the rest of us, to juggle the duties of owner and dentist. I’m not sure he’s happier or makes more money. Others who left found jobs with promised partnerships that failed to materialize, while still others bounced from one job to another. Reputation generates referrals and demand. Moving disrupts both and negatively impacts your earning potential.
  4. The USC School of Dentistry became the Herman Ostrow School of Dentistry of USC, because he, a 1945 graduate of USC dental school, donated $35 million to the school in 2010. He practiced dentistry for 17 years before going into real estate development. I’ll let you guess where he made more money.

Unanswered Questions

I could practice another 22 years and take Social Security at age 65. But, financially, will it be worth leaving practice equity untouched? Could I grow the practice value? Could I grow the value enough to offset the tax liability? Would it be better to sell now and invest in real estate to provide income, depreciation, equity, appreciation, and leverage? In that case, a 1031 exchange would be available, and work would be optional.

Granted, real estate investments could appreciate at a slower rate than a typical dental practice. Future tax rates, including capital gains, are unknown. Practice ownership is not a panacea. If dentists can find a great job, they can have high earning potential and many investment options. What is the value of greater mobility, greater liquidity, and greater flexibility when renting your job rather than owning it? In many cases, your practice will own you.

More information here:

The Wealth-Building Lessons That Doctors Can Learn from Dentists

Who Owns the Doctor Jobs?

My 2 Cents

So, what’s my advice? Instead of investing blood, sweat, tears, and capital into a dental practice, dentists should consider creating passive income streams eligible for special tax treatment. As it relates to income and generating wealth, instead of chasing the dream of practice ownership, may I suggest you first do the following:

  • Become so good at providing dentistry that you can make $300,000+ as an associate.
  • Forget about work when you go home.
  • Develop other aspects of your life. Those will be more rewarding than the wealth you generate as a practice owner.
  • Invest and leverage your earnings into passive income streams like real estate or the market. Eventually, you will earn as much or more from your “night jobs” (those that provide income while you sleep). And the plus side is that you can delay taxes on your real estate equity through 1031 exchanges and pass them on to your children.

If you do these things and still want to own a practice after 5-10 years, go for it! I don’t regret practice ownership. But I have a lot tied up in it. If you follow my recommendation, you will not be learning dentistry, patient management, and business management simultaneously. You won’t need as much help. You will have a different relationship with your business than I've had.

[FOUNDER'S NOTE BY DR. JIM DAHLE: Long-term readers know that I am a big fan of ownership. I like to see doctors own their home; their job; “ownership” type equity investments like stocks and real estate; and side gigs like ambulatory surgical centers, radiological centers, urgent cares, dialysis centers, and labs. While I hate seeing doctors realize they can probably become wealthier as real estate professionals or entrepreneurs than medical or dental professionals and stop practicing, it beats having doctors who don't actually want to be practicing doing so against their will.

However, I would caution dentists not to be too hesitant to own their own practice. The main reason dentists almost need to own their practice (to a much greater extent than physicians) is because they get paid so much more to do so. Even though the asset (the practice) is illiquid and not eligible for 1031 exchanges (owning the real estate separately might help), getting paid $400,000+ a year instead of $175,000 a year (or less) goes a long way toward building wealth. Debt is a big part of the financial life of a physician. It is an even bigger part of the financial life of a dentist. Not only do they deal with larger student loans on average, but they must then borrow another $500,000-$1 million to build a profitable practice just to get the income they should be entitled to by virtue of their education. Dentistry, while better than law and veterinary medicine, is not as good a financial “deal” (income-to-student debt ratio) as medicine, so dentists must do all they can to optimize that deal.]

When it comes to owning your practice, do the positives outweigh the negatives? Could you have had a more balanced life if you were an employee instead of an owner? Do you have regrets, or did you make the right decision coming out of training?