A financial plan is the roadmap that guides you to your life goals – it shows how you intend to use your money to achieve those goals over time. While it may be straightforward – depending on age and life stage – for salaried employees, physicians and physician households must consider some unusual challenges and opportunities, and often need professional guidance in their financial planning.
As a doctor, you most likely had to incur considerable debt during your medical school and residency. Now you have to figure out how to pay it back, when – or if – to incorporate your practice, whether you want to pay yourself a salary, dividends or a combination of the two, whether you want to contribute to a Registered Retirement Savings Plan (RRSP) or tax. -free savings account (TFSA) or invest within your company, how much to save, when to retire and how to unwind your company in retirement. Tax planning, insurance and managing other risks throughout your career is also more complex than that of an employee. Finally, your planning should consider your spouse’s career choice and income at each stage, as well as, if you choose to have them, savings for your children’s education and other anticipated needs.
Getting Started: Creating a Debt Repayment Plan
The path to becoming a doctor is long, arduous and usually expensive. Nearly a quarter of medical graduates have medical debt of $140,000 or more, and the median medical graduate debt
Doctors start their careers later than most and are in more debt. And while your earning potential is very high, your earning years are shorter than most, and you’ll probably want to tackle your debt before you focus on saving for your longer-term goals.
It’s important to prioritize your debt: high-interest credit card balances and unsecured line of credit debt should be paid off first, followed by federal student loans – the interest rates on these are much lower and you will receive a 15% federal rebate. tax credit on the interest you pay on your federal student loans.
Don’t forget about taxes: a self-employed doctor, incorporated or not, is responsible for filing and remitting his taxes on time. During the year after becoming a practicing doctor, you will have to make quarterly installments and follow these amounts and deadlines or face interest charges and penalties – even more difficult, during your first year. self-employment, the Canada Revenue Agency (CRA) cannot estimate your income, so instead of being required to pay quarterly installments, your taxes for the year will be due when you file your return. If you haven’t put money aside each month, you could be in for a bad shock!
READ MORE: Tax planning for doctors
Don’t forget your short-term goals
Life does not follow a straight line: like many Canadians starting their careers, young physicians have immediate and short-term financial goals as well as long-term ones, such as getting married, having children, supporting education or their partner’s career. , or buy a house.
These goals should be incorporated into a financial plan where they can be prioritized alongside paying down debt and saving for retirement.
Relying on a healthy income to fund your lifestyle without any structured planning or budgeting can be a mistake. Let’s face it: high earners tend to spend a lot, especially in the first euphoria after school and residency austerity. Despite having a high income, buying a home can be difficult when you have heavy medical school debt and little savings for a down payment. Starting a family often means a long absence from work, for the doctor, his partner or both, and many years of expensive childcare costs.
A financial plan takes into account your short-term goals and aims to make your dreams a reality. This often means finding the best way to make the necessary trade-offs, such as pausing on aggressive debt repayment or saving for retirement while you’re saving for a short-term goal.
Ultimately, a financial plan can tell you if your goals and ambitions currently exceed your ability to pay for them over time and help you find a way.
Start investing for your future
Physicians have high human capital, that is, their ability to earn a lot of money over time. But they must convert this human capital into financial capital if they want to continue financing their retirement lifestyle.
Most retirees want to enjoy the same standard of living in retirement that they have enjoyed throughout their careers, and for most physicians this means they have become accustomed to a life of considerable comfort.
The key to converting your human capital into financial capital is to invest. Canadians have the option of contributing and investing in a number of account types, both registered — RRSPs and TFSAs — and non-registered (taxable). Investing a percentage of your income each year will help ensure you have enough retirement assets to continue to fund the lifestyle you want.
But you can’t just put money in various accounts and hope for the best. You invest to get a higher rate of return on your money than if it were in a savings account. This means understanding your risk capacity, investing in an appropriate and diversified mix of stocks and bonds, contributing regularly to your portfolio and sticking to your long-term strategy.
Physicians do not have the luxury of having a defined benefit or defined contribution pension plan to assist them in retirement. They are the only ones to invest appropriately.
(That’s changing: MD Financial Management (MD) and Scotiabank are developing Medicus, a pension plan designed specifically for incorporated Canadian physicians to meet this need.)
A financial plan can help you determine how much you need to invest for your desired retirement and how best to structure a portfolio that provides a rate of return commensurate with the risk taken.
Consider integrating your practice
As physicians become more established in their careers and their debt has been paid off or significantly reduced, their focus may turn to optimizing their tax rates and investment opportunities.
A big question physicians wrestle with is whether to integrate their practice. Incorporation comes with additional cost and complexity, but can offer huge benefits in terms of tax savings and investment opportunities. Incorporation can also provide a way for your spouse to become involved in your practice: he can choose to become an employee shareholder of the company, take advantage of income splitting to reduce his taxes.
When incorporated, a physician can choose to pay themselves a salary, dividends, or a combination of both.
Taking a salary means continuing to accumulate RRSP contribution room. It also means that the company must pay both the employee’s and the employer’s share of CPP contributions. A salary is taxable income for you as an individual, but deductible as a business expense for the corporation.
Dividends are taxed at a lower rate individually but are not deductible as a business expense. By paying yourself dividends, you will not earn RRSP contribution room, nor will you contribute to the CPP.
One income strategy is to pay yourself salary up to the annual maximum CPP pensionable earnings, which was $64,900 in 2022, or earn the RRSP deductible limit ($29,210 in 2022), then supplement your income with dividends to help meet your individual or family spending needs.
Finally, profits remaining in the partnership are taxed at a much more favorable rate than if you remained the sole proprietor. This means opportunities to invest inside the company to help grow that money for the future.
A financial plan guided by an MD* advisor who specializes in medical corporations can be invaluable in helping you determine the right time to incorporate, how to compensate yourself, and how to set up your business investments.
Start planning for retirement
So far, we’ve seen how your financial plan can help you prioritize debt repayment, compromise to save for short-term goals, invest appropriately for the future, determine whether to integrate your practice and optimize your tax rate.
As your medical career draws to a close, you’ll also need to think about how all of these puzzle pieces fit together to create your retirement income plan.
As mentioned earlier, most retirees want to maintain their current lifestyle in retirement. This means designing a strategy that meets your spending needs when you are no longer earning a high salary.
Considerations include when to dip into your RRSP, how to liquidate and withdraw your business assets (if incorporated), when to take your CPP and OAS benefits, and how to supplement your income with a TFSA and non-registered withdrawals as needed. .
A retirement plan is essential to help you determine if you can afford the expenses you want for the last third of your life. It’s not just about the numbers, but a good retirement plan can also help you find new meaning and purpose in your life.
You’ve spent decades as a doctor helping people, and perhaps you’ve been truly defined by your career. Now that you are planning for your retirement, you need a plan to spend your days, as well as your income. Whether it’s devoting more time to travel and recreation, volunteering, or spending quality time with your spouse, children, and grandchildren, setting that goal is key to a successful retirement.
Financial planning can help you make important financial decisions, prioritize goals, and plan for the future at every stage of your life. Whether you’re starting your career and worrying about student debt, you’re well established in your practice and facing complex decisions, or you’re just starting to think about what to expect after your career, a counselor MD can work with you to create a financial plan to meet your unique challenges and opportunities.
* MD Advisor means a Financial Advisor or Investment Advisor of MD Management Limited (in Quebec) or a Portfolio Manager of MD Private Investment Counsel.
The above information should not be construed as offering specific professional financial, investment, foreign or domestic tax, legal, accounting or similar advice, nor is it intended to substitute for advice from independent tax professionals. , accounting or law.