Value of advice: When med school meets parenthood

The value of financial advice: An MD-guided process​. This series from MD Financial Management (MD) illustrates financial situations faced by Canadian physician households, along with our planning process to solve problems and help you achieve your personal goals. While these composite case studies do not portray any single individual, they do reflect real-life conversations MD Advisors* have with physicians and their families every day.

There was a lot to celebrate the day Jake was accepted into medical school four years ago: his wife, Laurie, gave birth to a baby girl the same day. It was the couple’s first child and the start of a second career for Jake, who had been a high school science teacher for six years. They wanted a big family, didn’t want to delay, and knew there would be financial sacrifices living on Laurie’s income as a nurse.

Today, they are happy, busy and in debt, using a $300,000 line of credit to fund Jake’s medical training. The couple, both age 35, just welcomed child number three a few months ago, and Laurie is enjoying time at home, with parental leave benefits. Jake has finished his third year of med school and is getting ready to apply to residency.

The challenge: “Why aren’t our investments making us money?”

Jake and Laurie had heard, again and again, that the best way to boost savings and lower taxes is to contribute to an RRSP, a tax-free savings account (TFSA) or both. They’ve jumped to take advantage of limited-time offers from different financial institutions over the years, opening new accounts with perks like higher interest rates on savings, free trades or matching contributions.

Money is tight, but they always try to deposit $50 to $60 a month into their registered plans, expecting income tax deductions for RRSP contributions. They believed investing even small amounts, early on, would bring the power of compound growth to their savings. Only it doesn’t seem to be working.

“We’ve been putting money aside since 2010, but our investments have hardly budged,” says Jake. “It’s extremely frustrating. The markets have been doing well, but we’re not keeping up.

“Meanwhile, we read about kids on Reddit tripling their money in cryptocurrencies and meme stocks — it’s crazy. Should we be more hands-on?  I’m thinking about an online trading account, to invest tax-free in a TFSA.”

The numbers: the couple’s financial picture

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The analysis: an MD Advisor’s fresh eyes

Jake contacted MD online to open a new account. True to form, he was prompted by a promo on social media, through his medical student association.

After setting up a time for a virtual chat with MD Advisor Andre, Jake and Laurie’s hectic schedule caused them to cancel and rebook four times.

Andre says this was a telltale sign: “They were incredibly pressed for time and kept putting this off. Sometimes this signals to us how household financial decisions may also be stuck on the back burner.”

Fifth time lucky: the couple met virtually with Andre for the first of several video calls — timed for after the kids had gone to bed. As Andre got to know Jake and Laurie, it was clear to him that they had great ambitions about investing for their future, but they didn’t have a plan in place to see everything through.

Scattered savings accounts. Andre learned that Jake and Laurie each had several registered savings accounts, at various financial institutions. This made it difficult for the time-strapped couple to keep track of statements, to notice sudden changes, or to see the big picture of how dollars were allocated among investments with different risk levels.

Costly investments. The couple weren’t really aware how their money was being invested. For their second call, Andre asked them to share a few details from their account statements, and it was a bit of a shocker. Most of their investments were in deferred sales charge (DSC) mutual funds that charge a redemption fee. These can lock investors into poorly performing assets for years, while the dealer earns a trailing commission. (The sale of DSC funds is being banned in Canada, effective June 2022.) The management expense ratios (MERs) on some funds were exorbitant, as high 3.5%.

Unsure about strategy. Jake and Laurie confessed that they need advice on where to put money when they have it. For instance, they had a windfall of $2,500 recently, winning a 50/50 charity draw. They don’t know if it’s better to contribute to Laurie’s RRSP, pay off some debt or put it in a DIY tax-free savings account. Childcare costs aren’t an issue, since both sets of grandparents help out, but the couple have put off any education savings until Laurie is back at work full time.

The plan: tidy up, then take control

Once Andre understood what was most important to Jake and Laurie and how they saw their future as a family, he and his team put together a financial plan to take them there, one step at a time. The couple take pride in being frugal and resourceful, and don’t mind putting off certain things, like buying a house, until Jake is well into his residency.

At this stage, the plan focused on their most pressing concerns, like how to start making headway with their investments, while deferring longer term issues like retirement savings.

Declutter their investment portfolio. Rather than have so many accounts scattered randomly at many institutions, Andre suggested bringing their registered plans together under one umbrella. When all RRSP and TFSA assets are visible in one spot, it takes less time to manage and it’s easier to see how investments are doing. Consolidating accounts in one place can also help you avoid costly mistakes like overcontributing, which can result in taxes and penalties and help navigate the exit from some of the DSC funds with a specific strategy in mind.

Pause RRSP contributions for now. Given their low taxable income this year, Jake and Laurie’s RRSP contributions are unlikely to generate any significant tax deduction. They could pause these contributions for now and carry their unused RRSP contribution room forward into the future. By doing this, they can plan ahead to make the most of the tax deduction when their household income is higher.

Seize a one-time opportunity to kickstart an RESP. Jake and Laurie told Andre that saving for their kids’ education was extremely important, but they thought it would have to wait until Laurie was back at work full time. What they didn’t realize was how their low income could work to their advantage right now, making them eligible for larger government grants to help build savings in a registered education savings plan (RESP). As their income is likely to rise, Andre saw a now-or-never opportunity.

He recommended they use their $2,500 windfall to open a family RESP, with one-third to each child. The contribution is eligible for a 20% standard government grant of $500. Plus, the household qualifies as “low income” based on their last year’s adjusted net household income (they paid their parents for some childcare expenses, which Laurie was able to deduct on her tax return). As a result, the couple could get $500 more for each child from the Canada Learning Bond, and an extra $100 as a Canada Education Savings Grant — adding another $1,600 to the fund.

“That windfall meant so much more once they saw it multiply for their children. This is likely the last year they could qualify, once Laurie goes back to work full time, so timing is everything,” says Andre.

Time well spent

The financial planning process helped Jake and Laurie feel better about managing their money, and a more consolidated view of their savings plans has made it easier to track their progress.

They worked with their MD Advisor to simplify their finances, focus on their family’s priorities and prepare for a career in medicine.

*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.

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