How to repair your retirement plan after COVID-19

Even as COVID-19 lockdown restrictions are lifting, physicians must adjust to the new normal — a world of masks, physical distancing and more stringent sanitizing. Meeting these safety guidelines at your workplace will likely mean fewer patients yet higher expenses.

If you had to close your practice earlier this year and now expect to bill less over the near future, this could mean a hit to your retirement savings.  

While most physicians did not plan for the pandemic specifically, financial plans can account for potential reductions in income — either those that are planned for, such as sabbaticals or parental leave, or those that are a surprise, like sick leave, time off to take care of a sick family member, or a pandemic. The good news is that you can still meet your goals by adjusting your financial plan.

Start by talking to your accountant

According to a study by MNP LLP commissioned by the Canadian Medical Association, physicians could suffer a decline in monthly earnings of 15% to 267%¹ due to the COVID-19 pandemic, depending on their role, and where they work and what expenses they have to keep paying.

If you’re incorporated and have had to close your clinic or reduce your practice hours significantly, you may want to re-evaluate the amount and type (salary or dividends) of compensation that you take from your corporation.

Be sure to plan at the household level if you change your remuneration. While your corporate income may be down, your household expenses might also have decreased, so it would be natural to adjust remuneration. In doing so, however, you’ll need to understand the impact on your retirement savings. 

Accounting for this year’s lost income

Many physicians are incorporated and use their corporation to save for retirement. Any reduction in income this year could have a long-term impact, particularly when you consider lost compound growth.

Take an orthopedic surgeon in Canada who bills $500,000 annually and saves $50,000 a year toward retirement in his corporation. He is 10 years away from retirement. The reduction in billings due to the pandemic won’t allow him to leave funds in the corporation this year. If the physician doesn’t save his usual $50,000 in 2020, it will mean $82,350 less in the corporation to draw from at retirement.

This example is hypothetical and for illustrative purposes only.

It’s anyone guess as to when healthcare services will return to “normal” — if ever. That makes it difficult to estimate your future billings and savings. Having a financial plan that considers work-related and household expenses and making the appropriate adjustments can help you manage expectations and focus on a goal.

Besides saving through your corporation, you might also be saving through your RRSP. You may not have the cash flow to make your usual contribution. But if you decide to reduce your salary this year from the corporation, it will affect how much you can contribute to your RRSP for the 2020 year, since contribution room is based on 18% of your earned income, up to $27,230.

Remember that any unused contribution room can be carried forward. You can also think about contributing to a spousal RRSP to help level income in retirement.

How will all these factors affect your retirement?

Your MD Advisor* can help you run the numbers again and get you back on track by adjusting your retirement plan for the change in expected balances in your corporation, personal RRSP and spousal RRSP. It could mean adjusting your savings contributions, your asset allocation and asset location, the amount you contribute to a particular account, or how much you pay a family member.

The financial planning process involves adjusting your plans to meet changes in your life and retirement planning is a process that needs to be refined over time. Contact an MD Advisor to ensure you’ll meet your goals.

* MD Advisor refers to an MD Management Limited Financial Consultant or Investment Advisor (in Quebec), or an MD Private Investment Counsel Portfolio Manager.

¹ These two scenarios are in comparison to a baseline scenario, prior to the pandemic. The low-impact scenario is based on the reduction of physician services reported during the 2003 experience with the Severe Acute Respiratory Syndrome (SARS) while the high-impact scenario estimates more significant impacts, being approximately double those observed during SARS.

The above information should not be construed as offering specific financial, investment, foreign or domestic taxation, legal, accounting or similar professional advice nor is it intended to replace the advice of independent tax, accounting or legal professionals.