In this episode, hosted by Thuy Chou with special guest Chris Warner, we focus on spouses and partners of physicians, and discuss their unique experiences as part of physician households.
You’re listening to The Financial Literacy Podcast, brought to you by MD Financial Management.
Canada’s only national financial services firm dedicated to helping physicians and their families with their unique financial needs.
TC: Hey there, listeners! Welcome to another episode of The Financial Literacy Podcast. My name is Thuy Chou. I am so excited to be hosting this episode for you all today. This episode is very special because while all our podcasts are intended for the physician and their families, this one focuses specifically on spouses and partners, and their unique experiences as part of physician households. MD understands that life and goals always include the family, and today we're going to talk about how to plan at the family level, even if you don't comingle assets. We’re going to talk about how a physician’s unusual finances can impact their partner, and how a partner’s finances can impact the overall plan. And joining us today to share some of their expertise on the subject is Chris Warner. Thank you so much for being here.
CW: Thank you, Thuy. I’m really looking forward to looking at some of the subjects that have been talked about in other episodes, but from the perspective of the partner. As the spouse of a physician myself, I understand firsthand how important these talks are, and I think they give both parties some reassurance and help avoid unnecessary stress in the relationship.
TC: Yes, that is exactly our goal. Now just in case we have some listeners who are tuning in for the first time today, let quickly go over some of the reasons why a physician’s finances are so much different than the average person’s.
CW: Yes, for sure. So, the first thing that is going to set a physician’s finances apart is the amount of debt they incur during training. For specialists, this can end up being in the 300-thousand-dollar range by the time they are ready to begin practicing.
However, physicians’ finances can be different in some great ways, too. For one, a physician gets paid a much higher income compared to many other professions. Also, medical training debt are often provided at a very low interest rate. These two things combined makes it easier for physicians to pay off their large amounts of debt in a reasonable timeline, leaving room for savings opportunities and meeting other personal goals.
TC: Personal goals like retirement?
CW: Exactly. Another way physicians’ finances differ from most others is that they usually have to fund their own retirement. This means they need to start saving much earlier, often at the same time as when they are still trying to pay down their debt.
Note that this means that a spouse/partner with a pension plan could be a key player here, and we'll get to that shortly.
There are also extra expenses should a physician decide to start their own practice or incorporate, but we’ll touch on that some more later.
The main thing to remember is that a physician’s financial journey is unique and ever-changing. As a partner, you are impacted by all of this too. The debt can impact your ability to borrow for other, household things, you may be named a shareholder of a corporation, and in MANY cases, in fact in most cases, you're in charge of managing all of this!
And that’s what we are here to help you with. We are going to let you know you are not alone, give you some tips, and let you know we can work directly with you. We work directly with spouses/partners all the time, even when the physician is not, or not yet a client.
TC: Right. I think a journey is a great way to put it. So, let’s go through some of the common stages of a physician’s journey and what partners can expect to take on at each of those stages.
CW: Sure. Well, I guess the best place to start is medical training which includes med school, your residency, and possibly a fellowship. These are the years that your partner is going to be the most dependent on you. They will have some student loan or line of credit debt, and while they will be earning income during residency, it is unlikely that it will cover all of their expenses. This means that you will likely need to borrow or rely on you to be responsible for the vast majority of household expenses and any extra savings that you can manage.
Some partners with higher incomes pay tuition expenses while the partner is training, in some cases they keep debt and assets completely separate. There are pros and cons to both. It's up to you. There is no right or wrong. Keep in mind though, your marital situation, whether you are married or common-law, can have different implications.
Once your spouse has completed their training and begins practicing, you may quickly experience an increase in household income. However, that doesn't necessarily mean there will be an increase in available or disposable cashflow. It's possible that a lot of the billings will be held inside a corporation, used for business expenses, or directed to paying down debt. It’s also important to remember that physicians don’t get paid leave, so if they need time off at any time, let’s say for vacation or parental leave, there is usually a halt in income.
Plus, when it comes to debt repayment, on average, a physician could spend the first 8 years or so of their career paying off their student loans. You should also plan for additional business expenses should your spouse decide to start their own practice rather than join a group practice. As the physician partner begins to take home more income, you may want to adjust who is responsible for which expenses and who takes advantage of particular programs. For example, the higher income earner may now take on more of the household expenses, so the lower earner can focus on investments and savings for your shared goals. There are also opportunities for income splitting, and all of these scenarios could lead to tax benefits.
Once you’ve paid down a significant portion of your debt, your focuses can shift toward making larger or more frequent contributions to those investments and savings. Like I mentioned earlier, your partner’s debt will likely have a low rate of interest, so even if their debt isn’t entirely paid off, it’s better to start dedicating more of your funds toward your future, particularly retirement.
Now, we know that taking on that much financial responsibility can be overwhelming, especially when you probably also have your own individual financials to consider as well. So, I would definitely recommend talking to a financial advisor as early as possible.
TC: Yes! Especially an MD advisor, who will be very familiar with the physician experience, and how the spouse is a key player, whether they co-mingle assets or not.
CW: Exactly, MD advisors can still be extremely helpful even if you yourself are not a physician. They can help educate and guide you on how to balance your unusual finances so that you can meet both your independent goals and the goals you share with your partner.
And remember, your advisor is there for you every step of the way, so as your circumstances and your goals change, contact your advisor and they will help you amend you plan and keep you on track.
TC: I couldn’t agree more. But what would you say to someone who thinks that maybe taking on all the debt from their partner is just too much for them, and would rather keep their finances separate?
CW: There's nothing wrong with wanting to keep things separate, whether its assets or debt. In fact, there are sometimes advantages to doing this. For example, the spouse may earn a higher return investing their money than paying off their partner's low-interest, tax-deductible debt. They could also generate tax deductions from contributing it to an RRSP if it makes sense to do so, or even a spousal RRSP. There are lots of reasons to keep things separate, including tax and estate implications.
However, I would also make sure they know that there are some advantages to joining their finances that may affect their decision.
TC: Advantages to taking on six-figure debt?
CW: Yes, For example, if there is no opportunity cost, if the family is debt averse and debt causes them stress, or if they want to increase borrowing power at the household level for future purchases, joining your finances with your partner’s could be a good idea.
When financial institutions see that despite large amounts of debt, you are able to keep up and stay on top of your monthly minimums and interest payments, it reassures them that you can be trusted with other loans. And financial institutions who are familiar with physicians’ finances and their projected income are more willing to look past outstanding debt and continue to lend, knowing that you will be able to repay. This makes applying for things, like a mortgage, much easier.
TC: Right. That’s another important point MD wants their clients to remember. Your goals are important, and we know how to ensure that the complexities of being in a relationship with a physician don’t hold you back from achieving them.
CW: Absolutely. And again, that’s where talking to an advisor can help you set and establish goals, and work with you both individually, and as a family to get you there.
TC: And for physicians, there are benefits to being strategic, because they, and other members of their households have unique options and opportunities. It’s not really as simple as putting some funds away into a savings account every month, right?
CW: Right. Because physicians have a lot of financial obligations at the same time. Like we mentioned earlier, they sometimes have to fund their own retirement which means starting to save early, often while still paying down debt. And if they decide to start up their own practice, there are a lot of expenses involved that may distract from saving. Not to mention all the regular household expenses they need to stay on top of.
We have found in our research that when spouses handle the finances, not only for the family, but for the corporation. In fact, many spouses work for the corporation, and are named shareholders. This can have tax consequences to the spouse that we can plan for. So, while this can be an opportunity to split income and plan for retirement together, there can be some tax consequences, and a lot of work for the spouse along the way.
What we also sometimes see in couples where one partner is a physician is the use of the higher-earner’s income for most of the expenses and necessities. Then, the lower-earner’s income would be used primarily for savings and investments so that their returns can be taxed at a lower rate.
But there are also a number of other strategies that could help you get started on your savings goals, like spousal RRSPs.
TC: Is a spousal RRSP different from a regular RRSP?
CW: They essentially serve the same purpose, but the main difference, and why it’s great for physicians, is that the higher-earning spouse is making the contributions, but the lower-earning spouse is the beneficiary and would be the one to withdraw the funds for their retirement.
Spousal RRSPs are a great tool to for income splitting, but in this case, we are talking about your retirement income, not your take-home income. Normally you can split up to 50% of your eligible pension income with your spouse, but with a spousal RRSP you can split more. And whatever contributions are made become the property of the beneficiary.
It’s also helpful in terms of tax-saving because the higher-earner, who is making the contributions, will receive the tax deduction. So, there is an immediate benefit, and a benefit in retirement. But also, the lower-earner is able to have more savings than they would have been able to contribute on their own while the higher-earner is able to keep their savings low enough to avoid high tax rates, leaving both spouses with more after-tax income than if they had regular RRSPs.
Keep in mind that contributions made to an RRSP must be made from a salary. So, if a physician is incorporated, and paying themselves in dividend rather than a salary, their non-physician partner could contribute to a spousal RRSP for them. Similarly, incorporated physicians may pay themselves a low salary to save on taxes, in which case, their non-physician partner would be the higher-earner and making the contributions.
TC: That sounds like a great strategy. And that also leads into another major savings strategy, which you just mentioned: incorporating.
CW: Yea, absolutely. In fact, the main reason that physicians choose to incorporate is because of the tax-saving opportunities.
Incorporating doesn’t always makes sense for all physicians, and timing is a key factor in that. So, definitely talk to a financial advisor or an accountant before jumping into that process because it can be expensive and may not pay off for you.
TC: Well, let’s talk a little bit about how that works, because some of our spouse listeners might not be familiar with what incorporating is, and how it can affect them.
CW: For sure. So, in order to incorporate, you have to be a self-employed practicing physician. And what incorporating does is create a legal entity that would now own your practice and you would now become an employee and shareholder of that corporation.
This benefits physicians because it allows them to hold any surplus of their income in the corporation, where it is taxed at the lower small business tax rate. Meanwhile, their household income is no longer as high, and can also be taxed at a lower rate.
As a spouse, there are pros and cons to being named a shareholder or being employed by a physician’s corporation. A common saving strategy in this case is income splitting, which involves shifting some of the income that puts your partner in a higher tax bracket, to your income, thus saving even more.
Again, this needs to be done carefully and correctly, so make sure you are consulting with an accountant if you choose to use this strategy.
TC: Right. So, it seems like a physician and their spouse can really benefit the most when they are working together as a team to take advantage of all of these opportunities.
CW: Yes, of course. It’s like any relationship. One person cannot thrive without the other. There are more tools available in the planning toolbox when working as a team. You have to support and trust each other in order for both partners to be successful in their goals, especially when it comes to finances.
TC: That’s a good point. And we’ve been talking about what having a physician as a spouse can mean for your finances, but we haven’t really talked about how those financial aspects can affect the relationship between a physician and their partner. Now, neither of us are relationship coaches or experts, but are there any patterns you’ve noticed or tips for maintaining healthy conversations around finances.
CW: Yea, like you said I’m not here to give anyone marriage advice, but there are things that I think are important to keep in mind that can help physicians and their spouses avoid straining their relationship because of their finances.
The first thing you already mentioned, and that’s to remember that it’s a conversation. Communication is key to any aspect of a relationship, but when it comes to talking about your finances, you have to be completely open and transparent with your situation. You have to work on getting comfortable talking about those more difficult subjects, like debt, so that your partner isn’t blindsided down the road or when the situation gets out of hand.
We talked about whether to keep your finances separate from your partner, and that’s fine. Lots of people have their own individual chequing account or credit card for their own personal spending, but the important thing is that your partner knows about it. Especially if you are working toward shared goals, like buying a home or if you plan to retire together, your partner deserves to know if any aspect of your finances could be affecting those goals.
There’s also the issue of egos. We mentioned how when your partner is a physician you are going to see some flip flopping between which of you is the primary earner. The physician is going to be dependent on their partner while they are training, building debt, and not earning much income. Then, once they are more established in their practice, they’ll likely see the roles reverse with who manages the finances and who financial institutions will primarily want to deal with.
Couples in this situation really need to be aware and understanding of the fact that they both have an important role to play in those moments where their partner is counting on them to carry the bulk of the financial responsibilities. Remember, you are on the same team, and at any given time you are still working toward the same goals, so you have to let go of your ego and stay focused on whatever that goal is.
Again, it’s all about being open and honest, with yourself, with your partner, and with your advisor. Relieving financial stress can relieve stress in most other areas of your life, and having open conversations is the best way to do that.
TC: Very true. Now, I think we’re just about ready to bring today’s episode to a close, but before we go, are there any final notes you want to leave about how to get involved in finances as the partner of a physician?
CW: Sure. I think the main thing I want to leave spouses with is that while having a physician as a partner can bring some financial challenges, these challenges do not mean that you have to sacrifice other life goals for fear that you may not be able to afford them.
Financial institutions understand the demand and constraints that come with pursuing a career in medicine, and so they want to work with them and their families to make sure that all those other important goals are attainable. That’s why all of these strategies and programs exist.
Proper planning and open communication with your partner and the help of a professional advisor is the best way to ensure your goals remain within your reach. And that’s what companies, like MD, are here for.
TC: Awesome. Chris, thank you so much for joining us today and exploring the world of physician’s finances from a new perspective.
CW: Thank you. This was such a great experience, and I hope I’ve been of some help at least a few of our listeners out there.
TC: Oh, I have no doubt. And speaking of our listeners, thank you all for tuning in today. Like we said at the top of the episode, MD is dedicated to meeting the financial needs of not only physicians themselves, but their families as well. So, whether you are a physician or have a loved one who is, we hope that you will join us again next time, when we tackle retirement readiness for physicians. Once again, my name is Thuy Chou, and it’s been a pleasure hosting you today. Goodbye for now.
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