Physicians have unique needs when it comes to investing. Many have no employer pension1 and so must build up retirement savings for themselves. They start their careers later than the average Canadian because of the long years of training, which means fewer years to save and invest. What’s more, most are incredibly time-crunched and not particularly investment-savvy — medical school does not include much if any training on how to manage one’s finances.
So where to begin.
Here’s a look the basics of investing from a physician’s perspective.
Getting started
1. Paying down debt versus investing
Should physicians focus on paying off their debt as quickly as possible, or make just the minimum payments so they can start investing.
For physicians who are fortunate enough to start their career with low debt, a balance between the two — reducing debt gradually while investing and keeping cash available for emergencies — is a sensible one to take. Prioritizing debt repayment would mean forgoing investing for many years, and given that physicians tend to start their careers later than most other graduates, this could potentially delay your retirement.
Physicians graduating with a large amount owing should take a more aggressive approach to paying down their debt before starting to invest in a significant way. In particular, they should target debt with higher interest rates and debt whose interest payments are not tax-deductible.
2. RRSP versus TFSA — versus investing inside a corporation
Generally speaking, high earners well into their careers tend to favour saving through their registered retirement savings plan (RRSP) over their tax-free savings account (TFSA) or non-registered account. That’s because RRSP contributions are deductible and can bring them into a lower tax bracket.
When you’re just starting out as a physician, TFSAs are a sensible choice. Later on, when you’re in your highest-earning years, you’ll want to shift your strategy to max out your RRSP deduction limit and possibly even catch up on unused contribution room from earlier in your career.
Physicians, however, also have the choice of incorporating, and a medical corporation offers more investing opportunities and tax planning advantages. Physicians can pay themselves a salary or dividends (or a mix of both) and save or invest their remaining earnings inside their corporation for more favourable tax treatment.
All of this makes makes the investing choices even more complex for physicians. If they are incorporated, should they prioritize their TFSA or RRSP, or focus on corporate investments? This in turn may affect their decision on salary versus dividends: paying yourself a salary will build RRSP contribution room, while paying dividends does not. Which approach to take depends on the incorporated physician’s particular circumstances.
Managing your investments
1. Using an advisor versus doing it yourself
Being a physician can be extremely stressful and demanding. Do you have the time and knowledge to manage your own investments, or should you engage with a financial advisor who will do it for you.
A do-it-yourself approach can help you learn about investing in the early years of your career when there’s less at stake. Young physicians may feel they have time (and earning potential) to recover from an expensive investing “lesson..
DIY investing also certainly saves you money on investment fees. But think carefully about the trade-off: fees saved versus time spent.
Working with an advisor early on has its pluses. It can help you develop good financial habits, draw up a road map for the future, and get compound interest working in your favour. Financial advisors offer more than just investment planning. They can help you prioritize your financial goals, decide whether to incorporate, protect yourself and your family with the appropriate insurance, and start planning ahead towards retirement.
As you become more established you’ll have larger assets and more complex financial needs. At this point, working with an advisor is a must to help you manage your investments, implement smart tax planning strategies, mitigate risk and plan for retirement.
2. Determining your portfolio’s risk level
Physicians have high earning potential, and their careers are less sensitive to economic slowdowns than most. That may influence how aggressive an asset mix you want to hold in your portfolio. But your comfort with risk is important, too. A high-earning physician with a 30-year career ahead of them may be comfortable investing in 80% to 100% equities. A risk-averse physician, in contrast, may want to invest much more conservatively, like in a balanced portfolio with an emphasis on less risky investments and cash.
Putting it all together
1. Prioritize your goals
Paying down debt, buying a home, enjoying a holiday, saving for retirement: financial goals are about trade-offs and striking the right balance between the short and long term. For an early-career physician, that means coming up with a realistic debt repayment plan that still leaves room in their cash flow for short-term savings and investing.
At any stage, a financial advisor can help you wrestle with these bigger questions and prioritize your goals. They can also help you put the appropriate insurance in place and decide whether to incorporate your practice.
When it comes to investing, a sensible approach means sticking to a low-cost, globally diversified and risk-appropriate portfolio — not chasing the latest fad.
2. Target a reasonable retirement age
Retirement can seem a long way off when you’re first starting your practice. But knowing when you want to retire will help with the decisions you need to make in the present: how much you need to save, how quickly to pay off debt, when to buy a home, and how much you can spend each year to enjoy life during your working years.
It also will help you choose your asset mix, by determining the rate of return you need in order to retire by a certain age and continue funding your lifestyle.
3. Your retirement income plan
Once you retire from practice, you’ll start living on other sources of income. Unless you have a pension, this retirement income will consist largely of your investment nest egg. This comes with many questions: Should you change your asset mix? Which investments should you draw on first? How much can you safely spend each year?
This is where physicians, more than almost any other profession, will want to work closely with an advisor to help put all of the puzzle pieces together. Talk to an MD Advisor* to see what the right options are for you.
1 This is changing: MD Financial Management (MD) and Scotiabank have developed Medicus, a pension plan designed specifically for Canadian incorporated physicians to help address this need.
* MD Advisor refers to an MD Management Limited Financial Consultant or Investment Advisor (in Quebec), or an MD Private Investment Counsel Portfolio Manager.
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.
