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Podcast: Retirement planning as a physician

Whether you are just at the beginning of your medical journey or a seasoned physician, your retirement plan is  important in making sure that you and your family are taken care of. In this episode, hosted by Curtis Anderson  with special guest Stephen Hunt, we chat about how to prepare for retirement as a physician. Legal disclaimers and full transcript available here:

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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.

CA: Hello listeners! Welcome to this episode of The Financial Literacy Podcast. For those of you joining us for the first time today, this podcast series, made by MD Financial, is to help physicians and their families gain a better understanding of their finances. MD knows that physicians have very unique needs when it comes to their finances and their advisors have the best resources to help you plan and stay on track so you can achieve your life and career goals.

My name is Curtis Anderson. I am thrilled to have the opportunity to be your host today as we talk about how to prepare for retirement as a physician. Whether you are a seasoned physician or just at the beginning of your medical journey, your retirement plan is very important in making sure that you and your family are taken care of over the course of your career and lifetime.

And offering their own professional knowledge and advice, we have Stephen Hunt. Thank you so much for taking the time to join us here today.

SH: Thank you so much for having me, <host name>. I’m so excited to be here and talk about the exciting world of retirement. And I do mean exciting.

I know physicians work extremely hard to care for others throughout their careers, so our goal is to make sure that they feel cared for too, in terms of being well-prepared and well-informed to enjoy their next chapter - however that looks.

CA: That's awesome. Especially as they continue to care for us throughout this pandemic, with all the uncertainties, it's so important that there's a plan in place to move toward confidently.

SH: Absolutely!

CA: So, I guess we should start off by talking about why planning for retirement is so different for physicians.

SH: Yes, that’s a great place to start. We all know that becoming a physician takes a lot of training. And that training is very expensive. What that means is that physicians tend to start their career and earn a steady income later in life than most other professionals. And for the first several years of that career, they might be working to pay off the debt they accumulated in school and in training. While some may be able to make contributions to their retirement funds at the same time as they pay down their debt, most of their significant contributions won’t come until later.

There is also the fact that many physicians also retire later than the average person. MD did a study just recently that found that 38% of physicians currently practicing don’t expect to retire until after age 65.

Then you have to consider that most physicians do not have the benefit of an employer sponsored pension plan and have to fund more of their retirement on their own.

All of these factors mean that physicians need to be very strategic in their retirement planning, including planning at the household level, in order to make sure that they have enough resources to sustain them and their loved ones.

CA: Right. And as we know, the best way to do that is with the help of a financial advisor.

SH: Exactly.

CA: And why is that?

SH: Well, because retirement planning is made up of so many different components, an MD advisor has the skills and knowledge of how to bring all these financial pieces together, meanwhile the physician can focus on what's important to them: their loved ones, their goals, and their practice, for example.

CA: Fantastic. Now, before we get into all of those strategies for saving for retirement, can you tell us more about those different components involved in planning for retirement. What would a physician and a financial advisor likely talk about?

SH: Well, there are quite a few different elements that make up a retirement plan beyond just how much money you are saving. And while that is a big part, there are other things that an advisor needs to go over with you that are going to impact that goal, like what retirement activities you plan to explore, for instance.

So, when you sit down with an advisor, the first thing they will likely talk to you about is what you want your retirement to look like. Then, they will evaluate your current finances to see if your current financial position and strategy, if you have one, aligns with those goals.  A good advisor will assist you in developing your goals, if you have not yet spent much time thinking about them.

For most physicians, your investments will likely be your biggest source for your retirement income. This can include both registered investments, like your RRSPs or TFSAs, or your own personal investment portfolio. If you are an incorporated physician, your corporate account will most likely be where the majority of your assets are going to be held. Either way, your advisor can help you determine the right composition of your savings allocation to help balance current with future taxes.

Also, if you’re an incorporated physician, part of your plan will include how you plan to compensate yourself after you stop working. Since you will no longer be earning an income through your practice, you will likely choose to pay yourself dividends from your corporation rather than a salary. You may decide to close your practice and turn your corporation into a holding company for your assets or sell those assets and dissolve your corporation altogether. Your advisor, along with input from your tax advisor, can guide you through which options will suit your goals best and the process for whichever route you choose.

How you want to be remembered and the legacy you leave behind is another important part of your plan. You may want to leave something behind for a partner, your children, or other loved ones after you pass away. An advisor could help you align your personal goals with making sure your beneficiaries are taken care of. They will also be able to help you optimize current versus future tax liabilities, so they can make the most of what you have left them.

Just remember that your retirement plan is never set in stone. If your life changes along the way - like if you decide that you want to move, if you get divorced, or if you find yourself with a large inheritance, you can always touch base with your advisor to make adjustments to your plan so you can stay on track towards your goals.

CA: Amazing. So, it sounds like there are many ways that you can go about saving for your retirement. And especially for physicians who are often funding their own retirement, there’s a combination of multiple savings tools to do so. Let’s talk about what some of those tools are.

SH: Absolutely.

Most of these accounts and programs are pretty common and available to anyone. For example, TFSAs are very popular, especially since your withdrawals are tax-free. Plus, a TFSA can be used to save for a wide range of things but can make the biggest difference when it comes to your estate.   

However, things like RRSPs and RRIFs, while also quite common, are designed specifically for retirement and are fully taxable.

CA: And an RRSP and RRIF are not the same thing, right?

SH: Sort of. They are different types of accounts, but they use the same funds.

Your RRSP is your Registered Retirement Savings Plan. You make contributions to this plan and those contributions grow over the course of your life.

When you turn 71, you have to convert your RRSP to a RRIF, a Registered Retirement Income Fund. You can also choose to transfer your funds to an annuity, or withdraw the full balance; however, an RRIF allows your funds to continue to grow, while only withdrawing and paying tax on the funds you need.

The main difference between your RRSP and your RRIF is that you can no longer make contributions to this fund, you can only withdraw. This is where it’s beneficial to have multiple savings tools, because in the case where you are still working at this age, you have other places to make contributions.

Keep in mind though, that once you convert to a RRIF, there is a minimum amount that you must withdraw every year. So, for example, the year you turn 71, the minimum you must withdraw is 5.28% of the value of your assets that were in your account on December 31st of the previous year. This percentage increases every year, meaning you have to withdraw more and more, paying more tax each time as well. That also means the earlier you convert your account, the earlier those withdrawals begin, and the more tax you pay over time.

However, you can also delay withdrawing funds from your RRIF if you are married and your spouse is younger than you by basing your withdrawal schedule on their age.

And converting your account is fairly simple. Your financial institution that holds your RRSP will contact you when it’s time to convert and provide you with the necessary paperwork you need to complete. If you do not convert by the time you turn 71, your RRSP will be deregistered, which will result in major tax consequences for you.

CA: Alright, and whether you are withdrawing from your RRSP or RRIF, those withdrawals are taxed as income, correct?

SH: Correct.

CA: Right. And those accounts function the same whether you’re a physician or not. Are there any savings tools that a physician might have to look at a little differently?

SH: Yes. So, the reason most physicians have to fund their own retirement is because most physicians do not have a private pension.

In Canada, we have the CPP, Canada Pension Plan. Quebec has their own separate fund called the Quebec Pension Plan, and it functions in essentially the same way. In order to qualify for CPP or QPP payouts in retirement, you would have had to have made contributions to the plan while you were employed.

Usually, your contributions are split 50/50 by you and your employer, your contributions being automatically deducted from your paycheck. However, since physicians are self-employed, you are responsible for 100% of your CPP or QPP contributions.

The challenge for physicians is that your pensionable income is based on salary only. This means that physicians who have chosen to compensate themselves in dividends from their practice are not eligible for CPP or QPP. But for those physicians who have made contributions, you are eligible to receive pension payments as early as age 60.

CA: So, how do CPP or QPP payments work?

SH: So, the amount is calculated based on the number of years you have contributed and your annual pensionable earnings, how much you make.

The average monthly payment for someone receiving the benefit at age 65 is a little over 700 dollars a month. But your benefit will increase with inflation every year.

You have to apply to begin receiving your payments. And as I mentioned, you can start as early as 60 if you need to, but there are benefits to holding off on this until later. Delaying your benefit payments means your monthly payments will be larger since your funds are being given out in a short period of time. The other advantage is that when your amount is calculated, your past earnings are updated to what they would be valued at the year you start your benefits. The longer you delay the higher that adjustment will be. That means if you wait as long as possible, which is until age 70, you could receive 50% more that if you started at 65, which is when most people start.

CA: All of these sounds like great options. And just going back to when we were talking about planning, you mentioned that an advisor would help you figure out how to use all of these saving methods strategically. Can you expand some more on what exactly that means?

SH: Yea, I’d love to. So, as we just talked about, each of these accounts or investment types have their own unique characteristics upon withdrawal. That means the best order in which to withdraw from them will depend on your goals.

For example, let’s say you are focused on minimizing the tax you’re paying during retirement. In that case you would want to start withdrawing from your TFSA first since those funds would be tax-free. From there you can move on to withdrawing from your personal portfolio and, if you have one, your corporate account. The key component here is to leave your CPP, RRSP, and RRIF for last because, as we mentioned earlier, those withdrawals are fully taxable. Just don’t forget about those mandatory RRIF withdrawals every year once you convert your account.

Now if your goal is to preserve your estate, and leave as much to your beneficiaries as possible, then your strategy is going to be the total opposite. You are going to want to withdraw all of your taxable retirement income first, so your CPP, RRSP, RRIF, and leave your TFSAs until last. This way your beneficiaries do not have to pay tax on their inheritance.

Another strategy your advisor will likely discuss with you is consolidating your accounts. Maybe you have multiple RRSPs or TFSAs with different institutions. But in terms of long-term planning, this can hurt you because it can be hard to keep track of all of these different accounts. An advisor can help you consolidate you accounts so they are easier to maintain, helping you better assess how your assets are being allocated. Plus, consolidating all of your accounts into one institution can result in lower fees.

CA: And I’m assuming another key component of retirement strategy is timing. We talked about how timing for physicians is sort of shifted because they start their career later and might retire later. So how does a physician judge when the right time to retire is?

SH: Well, that’s tough to answer because it’s going to be different for everyone. It depends on your goals and what you want your retirement to look like. But there are some things you should consider to see if you’re in a good place to start winding down or if you may need to wait a few more years.

You definitely want to look at your finances and see if everything is in order and you’ve saved enough to fund your lifestyle without your regular income. Do you still have loved ones who are dependent on you? Is your partner still working, and if not, have you considered how their retirement fund with work alongside your own? Have you planned to have extra funds to cover any medical issues you may face as you get older or in case of emergencies?

On a similar note, your health could be a big factor in when you choose to retire. It’s no secret that being a physician is a very demanding career and can take a toll on your physical and mental health. Are you in a place and at an age where you can step back from working and focus on your health?

Are you expecting any big life changes or events in which saving for a few more years would be beneficial to you? This could be a major home reno or a move. Or maybe your want to help your children fund their education, or their wedding or their first home. In this case, if you’re able, it might be better to continue working a little longer rather than dip into your retirement savings for those things.

Whatever your individual circumstances, the best thing to do when trying to determine when to retire is to talk to your advisor. They will run retirement projections for you and make sure there are no surprises when it comes time for you to retire.

CA: Absolutely right. Well, we are coming to the end of our episode today. But before we go, is there anything you want to leave our listeners with?

SH: Yes. If you take anything away from today’s episode let it be this: it is never too early to start thinking about retirement. As a physician, your money is going to be stretched a million different ways. You have such a unique financial journey with balancing med school and training debt and practice expenses, on top of the typical challenges that come with funding things like your home and family.

Let your later years be less stressful by planning and preparing as early as you can. And professionals, like the advisors at MD, can help you do just that. They understand how hard physicians work in their career to help others, and so they are dedicated to making sure that your retirement can be an enjoyable and rewarding time to focus on you.

CA: Amazing. Steve, thank you again for joining us today. It has been a pleasure having you on.

SH: Thank you. I’ve had a great time and I hope I’ve been some help to listeners.

CA: No doubt about it. And a big thank you to our listeners for tuning in today and continuing to tune in. Once again, my name is Curtis Anderson, and I have had such a wonderful time hosting you all today. Next time we will be going into more detail about estate planning for physicians, so if you’ve enjoyed learning about retirement, be sure not to miss that. Until then, take care. Bye!

This has been The Financial Literacy Podcast brought to you by MD Financial Management.

For more information or to speak to an advisor today, visit our website at md.ca

The information contained in this podcast is not intended to offer 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. Incorporation guidance is limited to asset allocation and integrating corporate entities into financial plans and wealth strategies. Any tax-related information is applicable to Canadian residents only and is in accordance with current Canadian tax law including judicial and administrative interpretation. The information and strategies presented here may not be suitable for U.S. persons (citizens, residents, or green card holders) or non-residents of Canada, or for situations involving such individuals. Employees of the MD Group of Companies are not authorized to make any determination of a client’s U.S. status or tax filing obligations, whether foreign or domestic. The MD ExO® service provides financial products and guidance to clients, delivered through the MD Group of Companies (MD Financial Management Inc., MD Management Limited, MD Private Trust Company, MD Life Insurance Company, and MD Insurance Agency Limited). For a detailed list of these companies, visit md.ca. MD Financial Management provides financial products and services, the MD Family of Funds and investment counselling services through the MD Group of Companies.

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